IN 1912 Americas The Supreme Court ruled that a coalition of 14 railroad companies had used their joint ownership of a Mississippi River bridge near the St. Louis terminal to unlawfully suppress competition. The crossing gave the railroad a stranglehold on traffic to and from the city’s main terminal. St. Louis was a major railroad hub. Therefore, in the court’s view, monopoly power over the railroad bridge was a means of foreclosure of business to competing railroad operators across America.
More than a century later, American trustbusters are preparing for battle with another giant in a network industry. In January, the Department of Justice (doj) filed a 155-page complaint against Google for monopolizing digital advertising on exchanges. It is alleged that Google used strong tactics to lockdown its ad tech business. The case is being billed as the biggest antitrust challenge to the technology since doj‘s epic battle with Microsoft in the late 1990s.
The case centers on Google’s acquisition of DoubleClick in 2008, which had carved out a lead in the marketing of digital advertising space. It has become almost an article of faith among regulators that the Federal Trade Commission (ftc) should have blocked the merger. As if to compensate for this negligence, Trustbusters have recently attempted to block many technology mergers, including Microsoft’s purchase of Activision Blizzard, a video game maker. The doj seeks to break up Google’s ad tech business – effectively reversing the DoubleClick merger. However, it’s far from clear that approving this merger was actually a mistake.
To understand why, start with a stylized view of Google’s ad tech “stack.” The middle tier is Google’s Ad Exchange, which brings together buyers and sellers of ad space (or “inventory”). On one side of the market are website publishers looking to sell ad space. They submit sales requests through a digital tool. The precursor to Google’s sell-side software is DoubleClick for Publishers, which was acquired as part of the merger. On the other side of the market are ad buyers, who have two routes to the market. Agencies and large ad buyers use demand-side platforms to bid on inventory. Smaller advertisers move directly to Ad Exchange. Google’s share of traffic varies from 40% to over 90%, depending on the stage of the journey. Bids and offers are matched by complex algorithms in the moment between a click on a website and the appearance of a display ad.
In a case like this, the best question to start with is simply: where is the bottleneck? Microsoft has been accused of tying Windows, the dominant operating system for desktop computers, to Internet Explorer in a way designed to lock Netscape and others out of the web browser market. Windows was the bottleneck, as was the bridge to St. Louis in the case of the railroad. The charge against Google is more complex, or at least the story is harder to tell. The place of the monopoly in which dojsays seems to be shifting. First, it’s because of Google’s power on the demand side of digital advertising through its adjacent strength in search ads. At other times, it’s the company’s supply-side stance that’s been bolstered by its DoubleClick acquisition. At other times, the locus of market power is the stock exchange. This shape shift may simply be how foreclosure works in digital markets. The dojThe Trustbusters of are certainly eager to portray Google’s end-to-end presence in the ad-tech stack as inherently sinister.
But is it? The profitability of the ad tech stack might reflect the fact that it’s more efficient under a single roof. The integration of Publisher Ad Server, Exchange, and demand-side platforms will likely result in smoother data flow, better matches between buyers and sellers, and a more streamlined experience. And there are “network externalities” to consider. Ad Tech brings different groups together (advertisers, publishers and consumers). Each type of customer benefits as more customers come from the other types: advertisers want access to a wide range of inventory; Publishers want many bidders for their exhibition space; etc. In similar types of networks, it is common for one company to serve all sides of the exchange. Think of payment systems that do business with both credit card users and merchants.
Implicit in the doj Fall is the idea that the only route to a large chunk of the consumer market is through Google. Trustbusters like to narrowly define markets. The smaller the market, the larger the leading companies. For their part, companies like to claim that good substitutes for their products are everywhere: the CEO of Netflix once claimed that the company’s main competitor is “sleep.” It’s fair to say that “exchange-sold open web display advertising” is a distinct industry as it has its own unique production technology. It’s less obvious that this is a market that’s really separate from digital advertising or just plain old advertising.
Back to the Future
It’s not obvious either ftc was negligent in approving the DoubleClick purchase. After all, the European Commission – not a friend of American technology – allowed it after a thorough investigation. However, perhaps there was a better option, says William Kovacic ftc Commissioner at the time of the merger and now a law professor at George Washington University. Instead of going to court to block the merger and (probably) lose, the agency could have pursued internal administrative proceedings. Officials would have done this an opportunity to learn about technology and update its practices, says Mr. Kovacic. It might have allowed remedial action, aside from rolling back the merger, to put Google on guard. The accusation of “poor antitrust enforcement” that has fueled today’s overactive merger control might not have caught on.
That’s hardly any water under the bridge. An epic court battle is about to begin. It might seem strange that this corner of the advertising business – almost a side business for Google – will be the place to do it. But antitrust cases often depend on obscure details or arguments. It’s no more unusual, after all, than a Supreme Court ruling against the use of a railroad terminal in St. Louis. ■
Read more from Free Exchange, our column on business:
What would the perfect climate protection lender look like? (February 23)
Arguments for globalization optimism (February 16)
Google, Microsoft and the threat of overpowering Trustbusters (9 February)
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