Google Antitrust Lawsuit — Part 1 : How ad exchanges work

A look at ad exchanges, how the process works and a quick intro to the antitrust law

I hope you all are doing well and welcome (if you aren’t new then again) to Dozen Worthy Reads. A newsletter where I talk about the most interesting things about tech that I read the past couple of weeks or write about tech happenings. You can sign up here or just read on …

In other news I’ve started a People Analytics class at Berkeley-Haas this semester from the Zoom-fort of my own home and while I loved being in a classroom environment this will suffice … for now! Our company also conducted a virtual product workshop with SVPG. Both the book, Inspired, and the class are amazing and well worth your time.

I know that I haven’t written a DWR edition for a couple of weeks now but I assure you next week will be a DWR. Onto this week’s article:

Christmas came early for Google in 2020. On Dec 17th, 2020 Texas and nine other companies filed an antitrust against Google accusing them of an antitrust violation in order to continue to maintain/boost market share and revenue.

Long before we get into the antitrust issue lets look at this from a tech perspective and understand what the actual lawsuit is about but in order to do that we (and I really mean me as well in this case since the adtech ecosystem is convoluted!) need to understand where this issue lies

Facebook and Google are very well known for their owned advertising. This is first party advertising on their own (owned) properties

For example on google.com the below are first party ads

For Facebook this is in-feed advertising (and now I guess you all know that I love a good taco!)

This lawsuit is not about that specific ad inventory (which Facebook and Google sell via adwords and Facebook Ads. This is about inventory not on Facebook or Google, which is 3P (3rd party ad inventory)

For example the below from Digiday the section on the right is an ad (and of course we all know this)

In order to show you THAT specific ad Digiday listed their inventory on Google Ad Manager (Google DoubleClick for Publishers) where you, the publisher, specified that on a specific page they have “ad inventory”. Google also allows DFP publishers to turn on a feature called “dynamic allocation” that lets AdX compete directly for impressions with the deals sold by the direct salesforce. For every other ad network besides Google (see below) the ad would have to wait for an available slot after the direct deals were sold, since there would be no way for DFP to “know” that the demand exists, and most publishers would set their direct deals to get the priority impressions.

Of course when you set this whole thing up you let Google know what kind of a site you were (news, blog, household blah blah) and your website has specific sized “placeholders” where the ad’s would be shown

Now switching gears to the bigger picture. All of the above described the Sell Side (top left of the diagram below)

From WSJ : How Google Edged Out Rivals and Built the World’s Dominant Ad Machine: A Visual Guide

All this ad inventory is put up for sale on what are called exchanges which are real time auctions and Google AdX is one of the exchanges (of many exchanges). When a publisher (lets say Digiday) says “hey I have a user loading my website” send me your bids a buyer (lets say LISTRAK who advertised on DigiDay) says “Yes I wanna buy that ad slot for that price). This is done via Google AdX and the winning advertiser brings home the bacon, so to speak, by winning that ad slot. Now remember this happens billions of times with really small response times where the sell side and buy side connect (more on this below) however Google (without Header Bidding) gets first priority

Ad Server’s and Exchanges

This entire process described above is what is known as “programmatic advertising”. The Facebook and Google agreement (Jedi Blue) is in relation to this specifically. Buying and selling ad space programmatically is ~60% of the advertising spend which even for just the US is ~250B dollars (2020)

So WTF is header bidding? (they said it, I didn’t)

Now you need to understand one more concept : Header Bidding, which I’ve super simplified below but its key to understanding the inception of Google’s “open bidding”

Header bidding, also known as advance bidding or pre-bidding, is an advanced programmatic technique wherein publishers offer inventory to multiple ad exchanges simultaneously before making calls to their ad servers (mostly DoubleClick for Publishers). The idea is that by letting multiple demand sources bid on the same inventory at the same time, publishers increase their yield and make more money.

This is how it works :

So basically to simplify : Digiday determines a price and then uses javascript to pass that price into DFP to compete with all the ads their sales people may have sold, as well as the AdX price. In other words they have determined the highest possible price that their inventory will fetch at that very millisecond and send that back to DFP which now has multiple bids to possibly chose from

  • Bids from other AdServers (sent to DFP later on)
  • Bids from the sales force (direct selling by publisher)
  • Bids from AdX (Google’s exchange)

Header bidding in this way allows for publishers to have a “simultaneous” auction rather than the sequential strategy that Google uses. Going back to the below screen … The other ad servers (originally) are only called if AdX doesn’t have an ad with a high enough price. By 2016, about 70 percent of major online publishers were using Header Bidding

Open Bidding (v/s Header Bidding)

Now given that header bidding could potentially result in AdX (their ad exchange) not winning the bid (right up front) Google developed something called “Open bidding” which supported an alliance of exchanges. This allows for these exchanges to compete with Google but at the same time Google gets a fee for each winning bid. To be clear here, this is a new fee and Google Open Bidding charges the highest fee (5% fee for display a 10% fee for video and app)

That charge is on top of the exchange fee. So an exchange would take its cut from the buyer’s bid, then Google would take its fee.

Given that more and more publishers were experimenting with header bidding a centralized mechanism made sense for publishers. This gave rise to Prebid (open source, launched in 2015), Google Open Bidding (April 2016), and Amazon TAM (End 2016). The difference between “header bidding” and all the above? Well, quite simply one is unified at the server side rather than the client having to do the work.

Client Side Header Bidding : The competition to win the bid for publisher space (remember the Digiday ad) happens on the client side. In other words Digiday places javascript that determines which Ad exchanges get to participate and also sell their inventory to the highest bidder (even if that is not Google DFP/AdX)

Server Side Header Bidding : It’s the exact same thing except this bidding happens via a “bidding wrapper” on the server side in a unified auction where many AdExchanges (including AdX, Google’s Ad exchange) can compete and the highest bid wins and serves the ad on the publisher website.

Facebook’s move …

Just because Google launched Open Bidding it did not mean that everyone was using it especially given that Prebid already existed before that. In March 2017, Facebook announced that they’d move into header bidding. From : Facebook announces move into header bidding to take on Google

Facebook announced on Wednesday it is partnering with six ad tech firms to open up its Facebook Audience Network — which lets thousands of developers and publishers make money from their apps and mobile sites with Facebook ads — to their header bidding platforms.

For Facebook, which is often accused by the ad industry of being a “walled garden” that doesn’t offer full access to its lucrative data and inventory, the news marks an unprecedented step to build a relationship with the ad tech community.

….

Facebook isn’t building its own header bidder, but it is now opening up its Audience Network to mobile web publishers who use header bidding technology provided by six suppliers: Amazon, AppNexus, Index Exchange, Media.net, Sonobi, and Sortable. Later down the line, publishers who use open source header bidding wrappers like PreBid and PubFood will also be given access to Facebook Audience Network.

This threat that Facebook, would support header bidding (indirectly) would mean that publishers would not use “Open Bidding” which was created less than a year before this Facebook announcement. Eventually if publishers used Prebid (which was open source) then Google would suffer financial consequences (AdX exchange fee as well as the “open bid” fee)

Facebook’s announcement in March 2017

This test gave us important insights into the business dynamics between technology providers and publishers. With the way ad bidding happens in programmatic advertising, publishers are consistently losing margins to third party middlemen who make the rules and obfuscate the truth. These are well-known issues, and they are being combatted through new technologies like header bidding. Header bidding is a more transparent bidding process where publishers see what every advertiser or technology provider is willing to pay for every impression. The key principles of header bidding are:

  • All demand sources get the same information at the same time
  • The ad space goes to the source willing to pay the most
  • There is no arbitrage, no “averaged” waterfall and no secret auction manipulations by a demand source
  • A diversification and stability of revenue for publishers

So now given this announcement in March 2017, a mere 18 months later Google and Facebook signed a deal (which is the crux of the lawsuit). Obviously Facebook joining Google’s Open Bidding system seems like a complete 180 and lets face it, Facebook and Google are not friends at all!

The contract “JEDI-BLUE”

Their blog post did not of course reveal the juicy details alleged in the complaint. It is alleged that as part of the agreement Facebook received

  • Price Advantage Facebook pays Google a 5% to 10% transaction fee (vs more for other competitors)
  • Speed advantages (Facebook gets 300ms, v/s 160s for other partner companies)
  • Win Advantages : Guaranteed “win” rate. Predetermined win % for Facebook for ad auctions they participated in
  • Information Advantage : Direct billing relationships with the sites where ads would appear
  • Who was shown the ad’s (identify 80 percent of mobile users and 60 percent of web users)
  • Facebook’s bids not be used by Google to manipulate auctions in its own favor

Facebook in turn

  • Promised to bid on at least 90 percent of auctions (where the user could be identified)
  • Spend as much as ~$500M

The Lawsuit and the merits

The 130 Page PDF, while redacted, alleges many different issues with how Google handled competition and kinda “forced” publishers to use the system.

The lawsuit alleges that : As a result of Google’s anticompetitive conduct (multiple other things they did), including its unlawful agreement with Facebook, Google has violated and continues to violate Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. Plaintiff States bring this action to remove the veil of Google’s secret practices and end Google’s abuse of its monopoly power in online advertising markets. Plaintiff States seek to restore free and fair competition to these markets and to secure structural, behavioral, and monetary relief to prevent Google from ever again engaging in deceptive trade practices and abusing its monopoly power to foreclose competition and harm consumers.

Overview of Section 1 & 2

Section 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal

Section 2: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony

This of course is the basic definition of the two sections and there are a lot of nuances but I am a bit skeptical if this antitrust lawsuit has solid legs to stand on. First off as far as I understand it the sell side can always go back to header bidding. The deal between Google and Facebook is a bit problematic but does it really “monopolize” the market? Sure this contract allows both companies to make more $ but that almost seems like it’s a volume discount but none of the “special terms” provided to Facebook with the exception of “guaranteed win rate” seem to be an issue. Even that is not really a “price fixing” situation. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. … A plain agreement among competitors to fix prices is almost always illegal, whether prices are fixed at a minimum, maximum, or within some range. This does seem to be what happened here either (though I’m not sure how to tie up the win rate to the prices, and that will be harder to prove in court)

I will be writing a Part 2 of this with a deeper look at the above. Right now its very surface level. To be honest I didn’t think I’d go down the programmatic advertising rabbit hole as much as I did and the PDF of the lawsuit has a LOT of information which is worth a followup specifically teasing out Texas AG Ken Paxton’s arguments.

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