Google and DOJ’s battle over ad tech is about control

Both Google and the U.S. Department of Justice believe the other wants too much of one thing: control.

“Control is the defining characteristic of a monopoly,” said Julia Tarver Wood, the Justice Department’s legal counsel, during opening statements in the federal government’s second antitrust trial against the search giant, which began Monday in Alexandria, Va. The government argues that Google exerts too much control over every step of how publishers sell online advertising space and how advertisers buy it, resulting in a system that benefits Google at the expense of almost everyone else.

Google believes the government is trying to take control of a successful company by imposing more favorable terms of cooperation with rivals, ignoring the value of investing in technology and the unique efficiency of integrated tools.

At the end of a trial that is expected to last several weeks, U.S. District Court Judge Leonie Brinkema will have to decide which side exerted too much control — and ultimately, whether Google illegally monopolized ad tech markets.

Markets is the keyword, because one of the questions raised on the first day was how many monopolies Google might actually have. (A federal court in D.C. says it has at least one, since it recently ruled that Google has a monopoly in search.) The Justice Department alleges that Google has monopolies in three different ad-related markets: publisher ad servers (where websites sell ad space), ad exchanges (which facilitate ad transactions), and advertiser ad networks (where advertisers buy ad space). They also allege that Google illegally tied its publisher ad server to the ad exchange to maintain its monopoly position.

“One monopoly is bad enough,” Wood said in his opening remarks. “But here we have a trifecta of monopolies.”

Google argues that it is not a monopoly, and that in fact there is only one market: a two-sided market for buyers and sellers of online advertising inventory. In opening arguments, its defense attorney said the government is ignoring relevant Supreme Court precedent that says this is the best way to view such a market. The company also argues that regulators are dividing the field with terms like “open network advertising,” which Google calls artificial. What the government really wants, Google argues, is to require it to deal with its rivals — and that’s something the Supreme Court said isn’t really the job of the court system.

After opening statements, the Justice Department began calling its first witnesses, focusing on the tools publishers use to monetize display ads. These are ads that typically appear at the top or side of the page on news sites and blogs, populating themselves through super-fast auctions that run as the page loads. During the auction, the ad exchange helps match publishers and advertisers based on factors like topic and price, without active human intervention. This process is called programmatic advertising, and it’s used by The Verge is parent company Vox Media; and many others. (Vox Media’s president of revenue and development, Ryan Pauley, is on the list of potential witnesses but was not called today.)

Google tools play a key role in this process, with some of them accounting for about 90 percent of the market, according to the government. Google has a publisher ad server called Google Ad Manager (formerly DoubleClick for Publishers, or DFP), which helps publishers sell ad space. It runs an ad exchange, AdX, that facilitates transactions. And it owns an advertiser ad network, rounding out its trio of major products in different parts of the advertising world.

Four industry representatives testified Monday, representing the publisher (Tim Wolfe, senior vice president of revenue at Gannett), the ad exchange (Andrew Casale, president and CEO) Index Exchange), a marketer (Joshua Lowcock, Quad’s media president), and a publisher ad network (James Avery, Kevel’s founder and CEO). In testimony, the government tried to argue that programmatic display advertising isn’t something that publishers can easily replace with other types of advertising, including direct deals with advertisers or ads on social media sites. And it introduced the idea that moving away from Google’s tools isn’t such an easy decision, even if there might be a reason for it.

For example, in their depositions, Wolfe and Avery made clear that publishers largely don’t want to move away from Google Ad Manager. They said that’s because Google bundles it with access to AdX, and losing that package would mean giving up a lot of revenue—even if rivals offered a much smaller percentage to facilitate each ad sale. Wolfe testified that when Gannett received one such offer, that reduced collection rate didn’t make a difference because it wouldn’t offset the benefits of AdX.

Kevel, an ad server company, started out by targeting traditional publishers, but Avery says competing with Google proved impossible. He recalled publishers asking how his company would replace the revenue they were making from AdX, which Kevel simply couldn’t do. After trying to contact Google twice about how to connect Kevel’s ad server to AdX, Avery testified, his efforts were rebuffed. Kevel instead focused on facilitating things like sponsored listings for retailers.

Speaking from an ad exchange perspective, Casale testified that changing ad servers is a big technical challenge, so publishers rarely do it. Building new ones is “very complicated and expensive.” In the ad exchange market, Casale said competing with Google’s AdX is “very difficult,” and in experiments, lowering fees had only a “nominal” impact on the ability to acquire more customers.. Given the massive network effects needed to get an exchange off the ground, and the fact that the exchange’s visibility depends solely on ad impressions, “I can’t imagine anyone starting a new exchange today,” he said.

Google’s attorneys have challenged the witnesses’ arguments and credibility on cross-examination, pointing out ways that gamers like Avery could benefit if the court forces Google to provide access to its tools. Google will call its own witnesses to counter the Justice Department later in the trial.

This trial covers a very different terrain than last year’s antitrust battle in the District of Columbia. But on the first day of the hearing, both sides harked back to the earlier battle. The Justice Department noted during opening statements that another court had already decided the Google search monopoly issue, referring to a ruling by Justice Amit Mehta issued a little over a month ago. And while Mehta ruled mostly against Google, the tech giant cited a section of the ruling that favored it. The subject? A Justice Department argument that Mehta interpreted as requiring Google to contract with competitors — and therefore dismissed.