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--:-- Noel King: This is a very big deal. It is. The Department of Justice just filed a lawsuit calling for the breakup of Google, one of the biggest companies on the planet. It did. It doesn't get any bigger than this. Arguably. We may all think Google is a search engine. Google does not think that. Google thinks it's an ad business. And in fact, more than 80% of parent company Alphabet's revenue comes from Google Ads, more than $209 billion in 2021.
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--:-- Noel King: A challenge for the Department of Justice in this lawsuit, it claims that Google is abusing many of us with anti-competitive behavior, but the source material seems a little dry. A publisher ad server, that is such a clunky word, right? What does that even mean? It's really hard to get excited about this thing at the heart of the case.
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--:-- Noel King: And yet, Keach Hagee of The Wall Street Journal will tell us if Google loses and is forced to break up its ad business, we may be getting online to a very different internet. That's coming up on Today Explained.
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--:-- Noel King: Running a business comes with a lot of what-ifs. But luckily, there's a simple answer to them. Shopify. It's the commerce platform behind millions of businesses, including Thrive Cosmetics and Momofuku. and it'll help you with everything you need. From website design and marketing to boosting sales and expanding operations, Shopify can get the job done and make your dream a reality. Turn those what-ifs into... Sign up for your $1 per month trial at shopify.com slash special offer. It's Today Explained. I'm Noelle King.
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--:-- Noel King: Keach Hagee is a reporter with The Wall Street Journal. She covers the intersection of media and tech, which can be a very confusing intersection. And so I asked Keach to explain how Google's ad business works.
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--:-- Keach Hagee: Let's say that I'm on the website of her paper, The Wall Street Journal, and I'm seeing ads for shoe stores because, fact, I Google shoes quite often. So this is really a story about the pipes that make the Internet work. It's about stuff that the average person doesn't see.
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--:-- Keach Hagee: The story really begins with something called a publisher ad server, which is something that sits on the website of the Wall Street Journal or that services that website. And that server says, oh, here's Noelle. She's Googled shoes before. She might be worth this much money to an advertiser. So it puts out an opportunity for advertisers to bid to fill that spot.
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--:-- Keach Hagee: All right, everybody, here we go. Here we go. But I'm not Domino. All right, everybody, here we go. About to start the bidding for Noelle's eyeballs. She lives in Washington, D.C. She works on audio. She Googles shoes a lot. Can I get one?
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--:-- Keach Hagee: So that's the ad server sending information out into the marketplace. It then connects to something called an advertising exchange, which is like a marketplace. It's like the stock exchange. In fact, in the Department of Justice's suit, someone compared it to the New York Stock Exchange, right?
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--:-- Keach Hagee: There are auctions happening there between buyers and sellers in the blink of an eye. And then that connects to these other tools, sometimes called buy-side tools, but basically tools that advertisers use to put their ads in, actually load their ads, and then put a bunch of parameters into like what kind of people are we looking to sell our ads to?
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--:-- Keach Hagee: Podcasters really like my shoes, so I want to find more people in audio to sell to. My store is located in D.C., so I want to reach people in that area. How much are we willing to pay? I can probably only swing $500 for ads this month. And that determines what the advertisers are going to bid in that marketplace.
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--:-- Keach Hagee: One penny, one penny, one penny, one penny, one penny, one penny, one penny. So basically there's three pieces you really need to understand. The ad server, the advertising exchange in the middle, and let's just call them the buy side tools. That are the tools that the advertisers use.
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--:-- Keach Hagee: And ultimately, the company that's willing to bid the highest on my eyeballs is the bidder that wins? Sold! Basically, yes, although there are different kinds of auctions. But as the market has evolved to be more sort of direct head-to-head competition in recent years, first price auction, the kind of old-fashioned one we all think of, is mostly how it works.
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--:-- Keach Hagee: What is Google's place in this ecosystem? So Google makes tools for each of these things. And in each of those markets, it makes the dominant tool. And there are other companies that make some of these things and that compete with Google, but not very well is the issue here.
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--:-- Keach Hagee: So the really big one is that in the publisher ad server market, Google has 90% market share. Wow. 90% market share. That means almost any major website that you go to will be using Google's systems. That's the real biggie, and that is where so much of the legal weight of this case is resting.
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--:-- Keach Hagee: Then you have in ad exchanges there in the middle, it has more than 50% market share. Google's tool for this is called AdEx. There are other ad exchanges, but Google's is dominant. And then you have these buy-side tools. And it's a little complicated here because you have some buy-side tools for big advertisers, right? Like Procter & Gamble that have these huge staffs and have agencies, and then you have a different kind for small advertisers like the pizza parlor around the corner, those are going to use an easy self-serve option called Google Ads that is sort of a different type of tool than this very manipulatable, bigger buy-side tool that the agencies use.
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--:-- Keach Hagee: You know, in the world of smaller ads, Google is super dominant. And then in the world of bigger advertisers, the suit said it had around 40 market share. Its tool is called DV360. And it still a hefty chunk of the market. So when you put all these pieces together, especially the 90 in the publisher ad server side, it's a lot of dominance.
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--:-- Keach Hagee: How is it that Google makes the dominant tools in all three areas? Is Google just better at what it does than everyone else? Well, Google would certainly say so. You know, a lot of people in the industry also agree, like the tools are good, they work well together. But the main argument in the suit is that Google has used its captive advertiser demand, which is really those small advertisers coming in through the self-serve option, like the pizza parlor times 2 million.
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--:-- Keach Hagee: That is hooked in directly to the publisher ad server in a way that, at least for many, many years, was direct. So you couldn't really get access to that unless you were using Google's publisher ad server. And you couldn't get, like, access to real-time bids through their exchange unless you were using Google's ad server. So it's the way that Google has made rules for the way that its tools work to push out competition that is the issue here.
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--:-- Keach Hagee: The complaint filed today alleges that Google engaged in a pattern of acquisitions to obtain market dominance and, once it had obtained that dominance, a series of exclusionary acts to expand and to entrench its monopoly power.
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--:-- Keach Hagee: In the DOJ lawsuit, what examples, if any, do they cite of how Google has wielded its power? Oh, wow. There are so many. Here are just five examples. First. So, this exclusivity, right? Like setting rules that you have to use the Google ad server to get the full benefit of the exchange and vice versa.
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--:-- Keach Hagee: A Google manager made it clear that, quote, our goal should be all or nothing. Use Google's ad exchange or don't get access to our advertiser demand. Sometimes they would do things like decide, you know what, like it doesn't really have to be the highest bidder who wins as long as, you know, it averages out at the end of the month.
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--:-- Keach Hagee: So sometimes because we control every link in the chain, we're going to use our knowledge and our algorithmic ability to bid a little higher than the advertiser actually agreed to just so we can win the impression. And then we'll make it up later on. And the result of this is that AdEx, the exchange, would just win like a really shocking amount of the time.
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--:-- Keach Hagee: And of course, because that would happen, then that would like attract more advertisers to use it, which would attract more publishers to actually plug into it, right? So it creates these flywheel network effects that make the experience of using Google's tools seem in some ways better for everyone, but it's through distortion.
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--:-- Keach Hagee: One of the biggest critiques in the DOJ case about what Google did was how it responded to this thing called header bidding. Header bidding was the marketplace's attempt to respond to the early distortions in the Google system.
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--:-- Keach Hagee: So this thing called dynamic allocation basically allowed Google to see what all the other competitors were bidding and then come in and bid on top of it each time. Part of what was happening is that real competition was not occurring. You were not having an auction where every single bidder stands in the same row and bids at the same time and whoever is the highest price wins.
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--:-- Keach Hagee: So to try to get around this, the market created something called header bidding, which is a little bit of code that exists outside the ad server where publishers could offer up their inventory to a bunch of different competing ad exchanges. Then whoever won would then be fed into their system and then ad acts would then have the chance to bid on that.
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--:-- Keach Hagee: It was something kind of moving closer to a true competitive auction. And Google really hated it. So they came up with a very long array of ways to fight it. One of the ways I'm thinking about Project Poirot because it has such a fun title.
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--:-- Keach Hagee: They decided that they would punish publishers who used header bidding by creating this system that would try to sniff out who was using header bidding. And if you were using header bidding, their buy side tools would decide to send a lower bid for your inventory, which would mean you'd lose more of the time, right? And so you would have bad results.
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--:-- Keach Hagee: And they had warned their partners, you know, if you use, you know, header bidding, it's not going to be good for you. And Project Paro is one of the things that DOJ points out is just like an antitrust violation, basically. That's one example. There are many, many others.
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--:-- Keach Hagee: That makes complete sense. It's not that there's been no competition. There has been. Google has dealt with the competition in a way that may be illegal. Correct. A Google digital advertising executive asked the following question in an internal email exchange.
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--:-- Keach Hagee: Quote, is there a deeper issue with us owning the platform, the exchange and the huge network? The analogy would be if Goldman or Citibank own the New York Stock Exchange. Unquote.
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--:-- Keach Hagee: Who does this hurt, according to the Department of Justice? In their lawsuit, who do they name? Number one, advertisers, right? Anyone who's ever advertised on Google was overcharged for many years, and they allege that Google has a fee in the transaction between advertisers and publishers that is higher than others in the industry.
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--:-- Keach Hagee: So really, they take as much as 35 cents of every dollar that an advertiser pays before it reaches the publisher. So both advertisers and publishers are hurt by what the Justice Department argues is too high of a fee, right? A fee that is only so high because a monopoly is being illegally maintained.
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--:-- Keach Hagee: So advertisers are hurt, publishers are hurt, and they also allege that rivals are hurt. In addition to the harm that Google inflicts on content creators and online advertisers, the lawsuit alleges that Google's conduct has also harmed the United States government, including the U.S. Army.
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--:-- Keach Hagee: I mean one of the most fascinating things about this case is the DOJ is actually also suing on behalf of itself as a consumer because it says we are the federal government. We buy a lot of ads right. We use the web like everybody else. You know the military uses it. And so we are also a customer who has been harmed by this, which I thought was pretty interesting.
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--:-- Keach Hagee: So you've laid out what the Department of Justice says is anti-competitive behavior. What does Google say? Google says, first of all, that they're wrong, that this is a misunderstanding. And that the suit is basically just kind of a warmed-over version of what Texas and a group of other states filed several years ago.
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--:-- Keach Hagee: Let me put it this way. If the free market were a baseball game, Google positioned itself as the pitcher, the batter, and the umpire. They like to point out that a judge has thrown out what they say is much of that suit, which is not quite true.
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--:-- Keach Hagee: It is true that the Texas case is very similar to this case in terms of what they're complaining about. The Department of Justice has gone and found much more discovery. And it's a very persuasively written case. But it's true that the Texas case went before a judge and some of the allegations that they brought forward were knocked out.
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--:-- Keach Hagee: It was by no means like the majority of them. In the Texas courtroom, I will say, just because I was there when the judge was talking about it, Google's lawyer's case was a little different. Their argument was a little different. And their fundamental argument is, hey, it's not our responsibility to help our rivals. It's not our responsibility to open up our system so our rivals can compete with us.
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--:-- Keach Hagee: And if I wanted to boil down their legal argument, I think it's going to be that. So the DOJ is going out after Google, suing Google. And has it said what it wants Google to do about what it sees as anti-competitive behavior? Yes. And this is the part that's really wild. They want divestiture of the ad server in the ad exchange, which would completely reshape the digital advertising ecosystem.
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--:-- Noel King: We're back with Wall Street Journal reporter Keach Hagee, who was telling us that if the DOJ wins this case against Google, it will push Google to break up its ads business. It would be a huge deal because, as I said, 90% of large publishers use Google's tools to run their business right now.
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--:-- Noel King: You know, a publisher ad server, that is such a clunky word, right? What does that even mean? It's really hard to get, like, excited about this thing at the heart of the case. But there's a great line in the complaint. It was from a Google executive that describes a publisher ad server as something like the operating system for publisher revenue.
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--:-- Noel King: And I think that gets a little closer to why it's so important. It is literally the hole where the money comes in. That's it. It would totally reshape the industry because the way that things work now is entirely based upon the way that Google's pieces click together. All the dynamics pushing and pulling.
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--:-- Noel King: And so it would just reshape the dynamics of these auctions. I hear you saying it would drastically change the way digital ads are done. But you also said this could reshape the Internet. How? I mean, the internet is digital ads. That's what the internet runs on. The vast majority of websites that you see, even like Joe's blog or any little website at all, most of them have Google ads, right?
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--:-- Noel King: Like the overwhelming majority of every like small website on the web has ads that are run by the system, by the Google Display Network, which is kind of that AdWords, Google ads tool that I was saying. If these pieces fit together in a different way, maybe it makes them less efficient, or maybe it introduces competition and drives down the fee, the size of that fee that's like 35 cents.
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--:-- Noel King: If that suddenly is less, that also could perhaps change the business of digital media, which I don't know if you've noticed has been sort of struggling over the years. Okay, let's walk through how this changes for everyone involved. Let's say that I run Joe's blog. Joe is actually my given name. I'm Joe. My blog is about my life. But there are ads that pop up for people who come and read about my life.
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--:-- Noel King: How does it change my website? Well, it might mean that you are getting paid a different amount for the ads, right? Maybe more people are coming to click or less people are coming to click. So it might literally just change your financial reality.
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--:-- Noel King: It might also mean that you have more choices of different companies to work with to serve your ads. I mean you have that now but Google is so so so dominant. Again because of the way all these sort of reinforcing things click together if some of that was pulled apart you might have three really good options for who to serve your ads instead of one obvious one.
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--:-- Noel King: And then let's say my mom is on my blog every day looking to see what I'm up to. How does the experience change for her? I don't know that the actual like loading and seeing of ads would change that much.
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--:-- Noel King: Although I will say that one of the interesting things in the complaint is that it alleges a lack of innovation. It kind of says, you know, these tools have worked more or less the same for the last 10 years. There hasn't been innovation. That's one of the things that a lack of competition results in, right? It's not as much innovation.
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--:-- Noel King: So perhaps there will be more innovation in digital ads, right? Those display ads that we all see on the sides of things, those have been like that for kind of a long time, right? So who knows? Maybe we're going to see innovation about new formats that somehow there's a better model for.
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--:-- Noel King: Like a shoe ad that talks to me. Isn't that what we all need? But I would also add that theoretically, if the government's case is right, that what would change for your mom is that the quality of the content might improve because you're making more money as a publisher. Because Google's not taking as much of it. And then you can hire better writers.
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--:-- Noel King: Are there other changes happening in the online ad space? Google and what may happen to it is one factor. Are there other factors? Are things actually changing? Or is this mostly a static situation right now? Oh, it's very much changing.
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--:-- Noel King: So this is coming at a wild moment for digital advertising. This morning, Apple taking a stand on privacy. Releasing a new feature allowing customers to limit how much of their data is used and shared. The feature, dubbed App Tracking Transparency, will let you choose if you want your online activity tracked and sold to third parties, such as Facebook and other apps.
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--:-- Noel King: This decision to ask consumers whether they want to be tracked or not, turns out they don't. And that, of course, really hurt Facebook's business a lot. Facebook relies on targeted adverts. It relies on knowing lots of information about you and selling that to advertisers. If it can't do that, that's going to hurt its profits.
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--:-- Noel King: And so we saw this year for the first time that the so-called duopoly of Google and Facebook actually makes up less than 50% of ad spending. And that's frankly a surprising turn of events, having a lot to do with how much Facebook was hurt by Apple's privacy changes. But also due to the rise of players like Amazon and TikTok, you know, Amazon's ad business has been growing like a weed, even though it's still young.
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--:-- Noel King: So it is being reshaped in that way. And a lot of these concerns were really brought to the fore at a bit of a high watermark for Google and Facebook, where, you know, a few years ago, they were every single year gaining share. I mean, I think back when I first looked into this issue, I think we'd just come off a year where Google and Facebook made up more than 90 percent of the growth in the digital ad market that year. Right.
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--:-- Noel King: So it just seemed like they were just going to grow and grow and grow and eat the entire market. And that dynamic has been tempered somewhat. What? Meta stock is down 70 percent this year, profits down 50 percent in the third quarter. With the economy slowing, Meta is the latest tech company squeezed by a sharp decline in advertising revenue.
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--:-- Noel King: But they still make up half the ad market, which is a very concentrated market. So we're very far from like a truly diversified competitive digital marketplace. What happens next? Is there any precedent that could inform how this case might proceed? Without asking you to predict too much? Well, there is the precedent that antitrust cases take a super long time.
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--:-- Noel King: The Microsoft case took like the better part of a decade. Google is being sued by the DOJ on another matter regarding its search business. And, you know, we're several years since that complaint dropped and still no trial. It could be years and years before there is any resolution.
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--:-- Noel King: Where do you think all of these changes are leading? I hear you saying some interesting things here about our relationship to the Internet may be changing or we want our relationship to the Internet to change. What are sort of the big picture takeaways here, do you think?
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--:-- Noel King: I think that there has been a great deal of criticism of big tech in Washington, D.C., and yet there has been very little tangible action about it. We just saw a year pass under the Biden administration who hired all of these extremely aggressive sort of anti-big tech, anti-trust minded folks. And we saw a year pass in Congress where almost none of the legislation that was intended to reign in big tech and there was a great deal of it proposed became law.
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--:-- Noel King: Almost nothing. Very, very tiny amount. So to me, outside of the last DOJ suit, yes, we've seen like the FTC and the States Act. But this is perhaps the single most significant action that we've seen the government take against big tech. Today's show was produced by Amanda Llewellyn. We were fact-checked and edited by Matthew Collette and engineered by Patrick Boyd and Afim Shapiro. I'm Noelle King. It's Today Explained.
