The government claims Google uses monopolistic tactics to dominate the online ad market.
Has Google established a monopoly over online advertising? The feds say yes. Photo By BrionV/Flickr C.C. Share-Alike 2.0
The United States Justice Department, together with eight states including California, filed a weighty, 149-page lawsuit Jan. 24 against the company with perhaps the most familiar name on the internet: Google. In the case, the DOJ wants to force Google to sell off the most lucrative division of its trillion-dollar business, the Google advertising system.
If the case, the second antitrust action filed by the federal government against Google since 2020, were to succeed, it could lead to more competitive online advertising rates for businesses. It could also mean a World Wide Web with much more competitive media sources, where publishers need not rely on paywalls and subscriptions to support their online products. At least, that's what the government claims.
But will the government succeed in breaking what it alleges is Google’s stranglehold on the internet advertising marketplace—a market which sees, according to the lawsuit, 5 trillion online ads placed every year, or about 13 billion advertisements every single day?
The DOJ may have shot itself in the foot, some experts say, by demanding that a judge bring the complex and at times highly technical lawsuit to a trial by jury.
“How complex is all of this? As someone who works in ad tech, my greatest fear is ever having to go to a jury trial,” advertising technology executive Joel Cox told the site Gizmodo. “The people deciding my fate are the people who couldn’t figure out how to get out of jury duty.”
So what are the DOJ’s accusations against Google? What does the online colossus have to say in its own defense? And how do Google ads work, anyway?
What is Google to You?
The company has been around for only 25 years, but already the brand name “Google” is so familiar that like “Xerox” (and “FedEx” and “Jet Ski”) before it, the name has become a verb. More than nine of every 10 internet searches are carried out using Google. At the same time, Gmail accounted in 2022 for 37 percent of all emails opened worldwide—but the number was probably higher because the second-place finisher, Apple’s iPhone email app (33 percent), allows users to access Gmail.
More than one billion people every month, in 220 countries and speaking 40 different languages, depend on Google Maps to get them where they’re going. That’s 72 percent of all online map users. Google also crushes all competition in the online video industry. YouTube—which Google bought in 2006 for $1.65 billion a mere few months after the company went online—draws 76 percent of the internet video market.
Google created or developed (after purchasing) services that have changed the very nature of everyday life. And all of those household-name Google products have one thing in common. They’re free. Almost all of Google’s revenue (technically, revenue earned by Google’s holding company Alphabet) comes from a service that most users never think about, and if they interact with, are barely aware that they are doing so.
That service is Google Ads.
Google Ads For Dummies
Alphabet—that is, Google—has other ways of making a buck, but without its advertising business the company wouldn’t operate on anything comparable to the scale that it does today. Almost 81 percent of Alphabet’s $183 billion in 2020 revenue came from its ad operation. In 2021 the percentage was only slightly higher, 81.4 percent, but the amount of revenue went up considerably: $209.5 billion from advertising out of the company’s $257.5 billion total.
In 2022, Alphabet’s revenue growth slowed in the second half of the year, with a weakening of the ad market to blame. But revenues remained massive—just not quite as massive as the company had anticipated. Partly as a result, Alphabet/Google in January 2023 announced that it would lay off 12,000 employees, mostly in the Bay Area, or about six percent of its workforce.
How does Google generate such staggering amounts of cash from those tiny little ads? The bulk of ad revenue comes from a category Google calls “Search and other.” Mostly, that refers to Google’s core product, its search engine. When a user searches for a topic, entering a string of words into the Google search field and hitting return, the results page often includes a series of links marked “Ad.” Ad money earned from search-result ads account for 71 percent of Google’s total advertising revenue.
The “other” refers to Google’s other ad-supported services, including YouTube, GMail and so on.
Advertisers pay for these listings mostly on a PPC—pay per click—basis. In other words, every time a user clicks on an advertising link, the advertiser pays and Google’s cash register rings. The price of each click, however, is not fixed but is determined by auction. The software that powers this 24-hour, 365-day auction came to Google through yet another corporate acquisition, one that may not have seemed like it in 2007, but quickly turned out to be the most important corporate buyout in Google’s history, maybe even in the history of the internet.
When it bought an online advertising company called DoubleClick in 2007, Google was in its infancy as a company, pulling in just $16.6 billion in revenue, primarily through search advertising. After it bought DoubleClick for $3.1 billion, Google was on an unstoppable path to becoming the online ad behemoth that today drawsmultiple Justice Department lawsuits due to its domination of the market.
There are two aspects to the system that Google was able to develop by absorbing DoubleClick, as well as the competing online ad companies AdMob, Invite Media and AdMeld which it bought in 2009, 2010 and 2011 respectively. One was search ads, appearing on Google’s own search results pages. The other was display advertising—the graphical banner ads placed on millions of non-Google sites across the web.
Advertisers purchase these ads, and micro-target them to audiences who, according to Google’s data, will be most likely to buy what the advertiser is selling. They buy the ads by placing bids on “keywords,” that is, words that a user is likely to use in running searches. For example, a pizza joint owner who buys the keywords “best pizza” will see a listing for his restaurant appear on search results when a user searches for, “Where do I get the best pizza in my neighborhood?” The pizza advertiser also uses tools provided by Google to target ads only to users located in an area where they might actually be able to order from that particular pizza joint.
The bids on Google’s auction network are maximum bids. If Pizza Guy bids, say, $1.50 for the keywords “best pizza,” but Google’s algorithms determine that the keywords are worth only 75 cents per click, the pizza joint owner wins the ad placement. If Google decides that those keywords are worth $1.75, our hypothetical pizza salesman loses out on the ad.
There are innumerable nuances and wrinkles to Google Ads, which until 2018 was called Google AdWords, but the auction system is at the heart of how Google pulls in its advertising billions.
So What is the Government So Upset About?
Google’s various pieces of software—many obtained from DoubleClick—that allow advertisers to use its system, target their ads, place bids, and so on are collected into a toolkit under the single brand name Google Ad Manager. In its lawsuit against the company, the Department of Justice asks the courts to force Google to sell off its Ad Manager software kit.
Why? DOJ says, in the lawsuit, that by piecing together Ad Manager through its repeat buyouts of smaller companies, Google created something akin to a monopoly. The company can manipulate ad prices, take a bigger share of ad revenue than it deserves and effectively force advertisers to use its service thanks to its overwhelming market domination.
“One industry behemoth, Google, has corrupted legitimate competition in the ad tech industry by engaging in a systematic campaign to seize control of the wide swath of high-tech tools used by publishers, advertisers, and brokers, to facilitate digital advertising,” the government lawsuit asserts. “Having inserted itself into all aspects of the digital advertising marketplace, Google has used anticompetitive, exclusionary, and unlawful means to eliminate or severely diminish any threat to its dominance over digital advertising technologies.”
Every time a competitor pops up with new, innovative advertising technology that might poke a hole in Google’s dominance, the DOJ says, the “behemoth” will proceed to “quash” the threat in what proves to be a “swift and effective” manner.
As a result, “website creators earn less, and advertisers pay more, than they would in a market where unfettered competitive pressure could discipline prices and lead to more innovative ad tech tools that would ultimately result in higher quality and lower cost transactions for market participants.”
By scooping up rival ad services and creating a dominant advertising platform, "Google would no longer have to compete on the merits; it could simply set the rules of the game to exclude rivals," the DOJ lawsuit says.
The complaint also quotes an internal email from a Google executive that questions the company’s ownership of the industry’s top ad platform, advertising network, and ad “exchange,” the platform where keywords and ads are bought and sold.
"The analogy would be if Goldman or Citibank owned the New York Stock Exchange,” the complaint quotes the email as stating.
If the lawsuit succeeds, the government says, and Google is forced to shed its Ad Manager service, those upstart competitors could not only avoid being quashed, but would actually benefit. "Advertisers and publishers could have more leverage with more options with expanding players—and consequently more competition," Moody’s Investor Service Senior Analyst Neil Begley told Reuters news agency.
What Does Google Have to Say For Itself?
Google, unsurprisingly, sees little merit in the DOJ’s lawsuit and according to a statement issued on behalf of the Silicon Valley giant by Vice President for Global Ads Dan Taylor, the suit is an attempt “to rewrite history at the expense of publishers, advertisers and internet users.”
The government wants to “unwind” Google’s purchase of AdMeld and DoubleClick despite the fact that both purchases were reviewed and approved by government regulators when they occurred, 12 and 15 years ago respectively, Taylor wrote.
In the statement, the Google spokesperson also denies that the online ad industry lacks competition. In fact, the company says, the business is becoming increasingly competitive. Google is just “one of hundreds of companies that enable the placement of ads across the Internet.”
Taylor notes that in 2022 Microsoft acquired online ad platform Xandr, which was previously owned by AT&T, in a deal that went unchallenged by federal regulators. Shortly after the merger the streaming giant Netflix, which only months before announced that it was starting an advertising-supported service, selected Microsoft as its partner for creating a platform to place ads on the streaming service.
Apple also operates an advertising platform and in September 2022 announced a major push with the service, saying it would double the size of its advertising workforce.
Google also denies that it manipulates advertising prices. Instead, Google said in a separate response to the government’s allegations, its ad platform is designed to “optimize” the ads placed using Google Ad Manager, “to help them make more money from their ad space. We implement optimizations like this frequently, specifically to help publishers maximize their revenues. The programs referenced in the complaint were no different.”
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