On 14 June, the European Commission sent Google a Statement of Objections over alleged abusive practices in online advertising. This came on top of other European Union antitrust cases against Google services, including Google Search and Android operating system for smartphones. The latest thrust is different though because it is the first time that the Commission is considering mandatory divestment of the targeted parts of Google’s advertising services.
Calls for breaking up or splitting off parts of very large online platforms have been heard repeatedly in the last couple of years. The Commission’s objections are similar to the US Department of Justice’s January 2023 antitrust suit against Google’s online advertising, and to the UK Competition & Markets Authority’s launch in 2022 of an antitrust investigation into Google’s advertising business. The three cases target only a small part of Google’s online advertising business, ‘open web display’ advertising, in which Google acts as an intermediary between advertisers and publishers that make their webpages available for publication of ads.
Google and Meta/Facebook are the market leaders in online advertising, each accounting for about a quarter of the global market. However, open web display ads accounted for only about 15% of Google’s advertising revenue of $225 billion in 2022. With average advertising revenues increasing by 18 percentage points per year over the last decade, losing open web display revenue would equal a one-year setback in ad revenue growth for Google, which generates about two-thirds of advertising revenue from ads published on Google Search, YouTube and other ‘walled garden’ webpages that it owns and operates and acts as sole ad publisher. Google Search provides about half of Google’s ad revenues, and YouTube 15%. So far, competition authorities have had no issue with that part of Google’s advertising business.
The Commission’s antitrust investigation is not related directly to the EU Digital Markets Act (DMA, Regulation (EU) 2022/1925), though there may be indirect links. The DMA forces very large ‘gatekeeper’ advertising platforms to share basic ad performance and pricing data with publishers and advertisers. This will make advertising markets more transparent and will help in detecting competition distortions. Assuming Google is designated a ‘gatekeeper’, these ad-related obligations will apply both to Google’s advertising walled gardens and to its intermediation platforms for open web advertising.
Consumer data dominance
Google’s massive collection of consumer data enables it to deliver targeted advertising to consumers across its platforms, and to other web services outside its online estate. It combines consumer data with real-time targeted ad auctions to advertisers inside its walled gardens. This efficient technology has contributed to Google’s dominant position in intermediary markets between advertisers and publishers.
This is no justification however for abuse of this dominant position, which has already been documented in several studies, including a 2019 report by the UK CMA. The Commission’s latest Statement of Objections explains how Google favours its own intermediary ad exchange, AdX, in the ad auctions run by its own dominant publisher ad server, DFP, for example by informing AdX in advance of the value of the best bid from competitors, which AdX has to beat to win the auction. Google’s open web ads service mainly places bids on AdX, thereby reinforcing its own market position.
Distortions in these intermediary ad markets push up revenue extracted from advertisers and publishers. In principle, Google charges advertisers a 35% fee, with publishers receiving the rest. The 2019 CMA report estimated that market distortions enable Google to appropriate a larger share of advertiser spending.
Restoring competition in this intermediary market is expected to bring down the cost of advertising for advertisers and to increase revenues for publishers. Many publishers use advertising revenues to finance free online consumer services. More revenue for publishers would thus increase the supply of free online services and thereby increase consumer welfare. The US and EU competition authorities argue that the only way to eliminate these distortions is to force Google to divest its intermediary ad exchange platforms for open web advertising.
However there is a caveat. The antitrust cases focus on the price of advertising, not on the quality of targeted ads. Google’s strong market position may well be down to its trove of consumer data that enables consumer tracking across many devices and services, and makes an attractive proposition for advertisers. Breaking up that service may decrease the effectiveness of advertising campaigns for firms, if buyers of Google’s divested assets are unable to match this effectiveness.