United States v. Google LLC: Is Google’s Ad-Tech Stack Monopolizing Trade or Capturing Added-Value?
On January 24th, 2023, the Department of Justice (“DOJ”) filed a complaint in the U.S. District Court for the Eastern District of Virginia alleging Google monopolized the market for digital advertising technology in violation of U.S. antitrust laws.[1] The DOJ is alleging that Google violated Sections 1 and 2 of the Sherman Act through a pattern of anti-competitive, exclusionary, conduct across its ad-tech product portfolio (its “tech-stack”). The complaint, among other demands for relief, asks the court to order the divestiture of substantial portions of Google’s ad-tech business.[2]
Specifically, the DOJ is alleging that Google engaged in anticompetitive conduct by: (1) acquiring competitors; (2) using its exclusive advertiser demand to force adoption of its upstream tools (its ad-exchange and ad-server); and (3) manipulating auctions in surreptitious ways to benefit itself to the detriment of its publisher and advertising customers.[3] In making its allegations, the government points to a variety of evidence. In addition to describing a number of technical mechanisms Google deployed in advertising auctions, to which the government ascribes anticompetitive purposes, the government points to broad statistics regarding: (1) Google’s dominant market share in various segments of the market, between 40 and 90% of the market, depending on the segment (see Supply Chain Chart);[4] and (2) Google’s 35% average aggregate take rate across the entire digital advertising value chain (see Take Rate Chart.)[5]
Supply Chain Chart[6]
Take Rate Chart [7]
As the Government’s evidence suggests, it is indisputable that Google has a dominant position in advertising technology. However, fortunately for the defense, the courts have interpreted the Sherman Act to allow conduct that has anti-competitive effects under certain conditions. While certain egregious monopolistic arrangements are prohibited on a per se basis, other conduct with anti-competitive effects is permitted as long as the firm can satisfy the “rule of reason” by offering a procompetitive justification for their conduct.[8]
In the case at hand, the rule of reason is almost certain to apply. In a case similarly resting on tying of vertically integrated software products, United States v. Microsoft, the D.C. Circuit held that “the rule of reason, rather than per se analysis, should govern the legality of tying arrangements involving platform software products.”[9] The court goes on to explain that “[r]ule of reason analysis… affords the first mover an opportunity to demonstrate that an efficiency gain from its ‘tie’ adequately offsets any distortion of consumer choice.”[10]
As Google has already alluded to in a press release, there are numerous potential procompetitive justifications it could offer to rebut the Government’s allegations.[11] For example, Google’s end-to-end supply chain probablyeliminates significant data loss from the publisher to the advertiser, enabling significant enhancements relative to a supply chain requiring a hand-off between multiple platforms. It is likely that – by maintaining a stable user identity at each stage of the auction and fulfillment process – Google’s supply chain could substantially reduce bot-fraud and improve attribution and performance analytics, giving advertisers more confidence their ads are having the desired effect on consumers. Furthermore, while the government suggests that Google’s 35% take rate is excessive, it provides no evidence of how the fees of competitive supply chains compare. Although a 35% margin might sound high, that percentage covers fees that would normally accrue to at least 3 other market participants across the value chain, and may actually be a very favorable rate relative to the competition.
Ultimately, it will be for the court – and, likely, a jury – to determine if Google’s vertically integrated tech stack, and its conduct in designing and managing it, was “reasonable” and whether the efficiency benefits Google creates for publishers and advertisers justifies the anti-competitive effects suffered by its competitors.
Footnotes
