ACT President Jonathan Zuck, veteran of the 1990s tech industry antitrust battles, provides insight and analysis on the government’s growing interest in Google’s anticompetitive behavior.
“If you’re not paying for it, you’re the product not the customer.”
The public face of Google is its search engine. When we think about Google, we usually focus on the company’s search engine, a place where Google claims to be only “one click away” from competition. However, Google is not in the search engine business, it’s in the advertising business.
People who use the Google search engine are not Google’s customers, the companies large and small who pay to advertise amidst the search results are. Google makes nearly all of its money from its dominance of the search advertising market. Advertising is Google’s core business, representing 97% of the company’s profits. Google owns 76% of the search advertising market and will rake in an estimated $11 billion in revenue in 2011. Therefore, the FTC is rightfully focusing most of its energy on Google’s dominance and actions in the search advertising market.
Google & Advertising – An Uncomfortable but Incredibly Profitable Relationship
As discussed in my last post, Larry and Sergei originally believed that monetizing search engines through advertising would be “particularly insidious.” They eventually got over that theory, and started experimenting with advertising through its AdWords platform to monetize its search engine. Today, an advertiser can bid on certain keywords so that its ad features on the search engine when those words are used in a search query. The costs are based on a pay-per-click model so that advertisers only pay when their ads are being read. As the range of Google services has increased, these ads also run in the margins of Gmail and in designated advertising areas on virtually any website based on the content of those sites.
Steven Levy explains in his recent book, In the Plex, how Google discovered a profitable advertising model that relied on its appeal to small business.
On the internet it was possible to make serious money by catering to the “long tail” of businesses that could not buy their way into mass media. The long tail is the term used to refer to smaller, geographically disparate businesses and interests. The internet – particularly with the help of a search engine like Google – made long-tail enterprises easy to reach.
Small businesses could not afford to reach a national audience through television, radio or print media. These options were prohibitively expensive, so small businesses largely used local media outlets like newspapers and sometimes radio. As these options continued to lose appeal with consumers, online search advertising became the most effective way for small companies to get in front of potential customers.
FTC’s Antitrust Concerns; Restricting Competition
As Google’s AdWords program became a necessary advertising tool for small businesses, Google began leveraging its dominance through a variety of means to restrict competitors and preserve its standing atop the search advertising market. These are the issues that have attracted the attention of the FTC. Specifically, antitrust investigators are concerned with Google’s exclusive contracts that limit competition, its predatory pricing to secure these contracts, and its efforts to prohibit interoperability in order to deny choice to small business advertisers.
Two of the indicators of monopolistic behavior identified by the FTC are exclusionary conduct and predatory pricing. The search giant has attracted the attention of regulators by the proliferation of its exclusivity contracts. Google currently enjoys exclusive deals with a number of major online publishers like CNN, Fox, Disney, and the Washington Post.
In the deal to serve search functionality to these websites, Google offered publishers substantial guarantees of minimum ad revenue. In many cases, the amount far exceeded what the market could reasonably be expected to yield. In one case, Google paid Fox $900 million for an exclusive contract that Merrill Lynch estimated could net only $225 million in advertising revenues.
Taking such a huge loss shows that Google is willing to engage in predatory pricing at extraordinary levels in order to maintain its search advertising dominance. Antitrust laws were written to prevent a company from using its monopoly power to impede the entry or expansion of new competitors in order to preserve its market position. Google’s numerous exclusive agreements like these deny its competitors an opportunity to bid for big contracts.
Google’s Dominant Market Share Allows it to Block Interoperability
While Google is acting to limit competition for big contracts through predatory pricing and exclusionary conduct, it has also erected barriers to interoperability that prevent small advertisers from managing ad campaigns all search advertising platforms.
Since Google dominates online advertising, companies wanting to reach the widest audience must use its ad product. However, that doesn’t mean that small businesses would not want include additional advertising platforms services for price comparison or to reach a broader set of customers. What keeps them from doing this is that Google does not allow its advertising customers to use their ad data in cross marketing campaigns so they cannot effectively manage or compare Google ad campaigns with other companies’ products.
Advertising data for online ad campaigns is very important. Since expenses are measured in costs-per-click, and the frequency an ad runs is based on the auction value bid by the advertiser, there is a large amount of data available to measure effectiveness. Tracking this data is made simple online where an advertiser can monitor and make adjustments to an ad campaign in real-time on a single webpage.
However, when Google erects barriers to prevent advertisers from using their own ad data on other advertising platforms, it effectively locks them in. Advertising customers would prefer being locked in with Google, with over 80% of the market, than locked out. This provides little opportunity for competing platforms to grow. This lack of choice is bad for small businesses.
Google AdWords API Eliminates Options for Small Businesses
In addition to the higher costs associated with being tied to one company, small businesses also have very little flexibility to manage their ad campaigns. In technical terms, Google does not allow its advertising customers to use its AdWords application programming interface (API) to access their data with any other company’s product. This means that instead of reviewing the performance data for ads running on Google, Yahoo, AOL, and Microsoft platforms side-by-side on a single display, an advertiser must look at the Google data on one display and everyone else’s on another. That’s hard to do when reviewing thousands of keyword ads with many more thousands of data points.
If a company wanted to review ad performance side-by-side, it would be required to manually download the data for each keyword and then upload and reformat it into a separate document. This can be a 17-step process. A small business with hundreds or thousands of keyword ads does not have the time or resources to perform these tasks manually. The obvious solution would be to use program that automates the process, but Google has squashed attempts by third-party companies such as Atlas or Omniture from providing this functionality.
For small businesses with limited resources, it is far easier to avoid the hurdles Google sets up for multi-platform ad campaigns by only using Google’s AdWords. Tied to the market leader so firmly, small businesses are prey to higher prices because any other option is more cumbersome and made artificially more expensive by the obstacles in sharing data. Even more egregious, however, is that these restrictions apply even if a company decides to leave Google completely. The AdWords terms and conditions do not allow advertisers to use the Google API to transfer their own data to competing platforms even after terminating their agreement.
FTC Investigating Google’s Advertising Business is No Surprise
Google uses its dominant market share to draw in advertisers. Its monopoly power allows the company to implement onerous terms and conditions blocking interoperability and restricting competition from other advertising platforms. The search giant employs predatory pricing practices and exclusionary contracts to preserve its market share and prevent competitors from achieving the necessary scale allowing them to compete with Google. Small business customers, the profitable long tail of the search advertising business, are effectively tied to Google’s services with limited means to seek other options or to innovate within that marketplace.
These anticompetitive business practices are at the heart of our country’s antitrust laws. Achieving a dominant market share doesn’t automatically make a company a target for antitrust regulators. It is what that company does with monopoly power that attracts their interest. Advertising is where Google makes its money and, given its conduct in this marketplace, there is little surprise that the FTC has sought to investigate. The commission must have plenty of questions in this area.