Google Adtech Trial: Analysts Say Company Spinoff Will Be Worth $150 Billion

• The Justice Department and 17 state attorneys general are seeking to break up Google’s advertising business.
• Arete Research analysts suggest spinning off Google’s ad tech as a B corporation instead.
• Analysts say it could become a company with a market capitalization of $150 billion.

The Department of Justice and 17 state attorneys general are seeking to break up Google in a landmark ad tech antitrust lawsuit.

Closing arguments are scheduled for November and a ruling is expected next year. The government hopes the judge will force Google to divest some or all of its advertising business.

But shutting down or splitting Google’s ad unit “could cripple publishers,” said analysts at Arete Research, who wrote in a note last week that Google’s ad unit should instead be converted into a public benefit B corporation.

Companies receive B Corp certification from the nonprofit B Lab if they meet standards for social and environmental performance, as well as other areas of transparency and accountability.

The complaint against Google alleged that the tech giant used takeover and anti-competitive advertising auction tactics and bundled various pieces of advertising technology together to build an illegal monopoly in the digital advertising market. The case concerns the “open online display” digital advertising market and tools that support ad auctions that take place in the milliseconds it takes to load a web page. Google owns the tools publishers use to sell ads, the software advertisers use to buy ads, and the ad exchange that connects them.

Many experts believe that if the judge ruled in the government’s favor, the likely outcome of the case would be to order Google to spin off or otherwise exit the “sell side” of the advertising industry. In this case, Google operates an ad server that helps publishers manage their ads, as well as the Google Display Network, where it allows advertisers to buy ads on millions of third-party sites that they do not own.

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Arete analysts wrote that a brutal breakup or shutdown of parts of Google’s sales business could have unintended consequences for publishers. They said that almost every publisher relies on Google’s adtech tools and that separating the ad server from the ad exchange would be highly disruptive at a time when publishers are already struggling due to changes on other platforms and changes in advertiser spending.

Earlier this month, the publisher’s CTO shared with Business Insider his concerns about the breakup of Google’s advertising business. And executives who worked for publishers including News Corp. and the Daily Mail, took the stand in an antitrust trial this month to testify that switching from Google’s ad technology to competitors would cost them millions of dollars in lost revenue annually.

A Google spokesman declined to comment on the matter, but pointed BI to a blog post published on Friday. The company claims that changes made over the years have benefited competition and lowered prices for publishers and advertisers. He adds that the adtech market remains extremely competitive.

NetworkB – a public benefit advertising technology company

Enter “NetworkB,” hypothetically named Google adtech B Corp by Arete.

Arete suggested that Google’s parent company, Alphabet, should spin off its entire networking business, which generated $31.4 billion in 2023 (slightly down from the previous year). Some analysts predicted that the unit would likely shrink even further in the coming years, regardless of antitrust enforcement, as Google prioritizes its own services over third-party sites.

Arete proposed that Google Network would become a B company with a limited profit margin it could make from its customers, which is known in the industry as a rate of return. Arete estimates that adtech players currently retain between 8% and 42% of the ad dollars flowing through their channels.

Arete says the merger will free Google from accusations of favoring its own solutions and unfairly bundling services within its ad tech stack, while charging lower fees than rival ad companies. This would ultimately mean that publishers earn more, Arete analysts wrote. They also said that as a standalone company unrelated to YouTube, Network B could become more involved in other areas, such as connected TV advertising.

Arete calculated that while such a move would mean Google forgoing an estimated $29 billion in Google Network revenue this year, it is expected to generate only about $3.5 billion in EBITDA, or earnings before interest, taxes, depreciation and amortization. .

A B Corp dissolution would be attractive to Alphabet shareholders, who would ultimately own the largest adtech intermediary, which could have a market capitalization of $120 billion to $150 billion – a conservative estimate, Arete analysts say. Meanwhile, Alphabet itself would become a smaller but higher-margin company with less antitrust risk.

“Google could divest from its lowest-margin unit, end regulatory overhangs, and increase the value of its O&O assets while helping publishers around the world,” the analysts wrote. O&O refers to owned and operated inventory, such as Google Maps and Gmail, where proprietary data about logged-in users is valuable to advertisers.

Arete founder Richard Kramer told BI that the antitrust case revealed “certainly unwelcome disclosures” not only for Google but also other adtech players, such as financial data about adtech operations and how they charge advertisers and publishers.

“As analysts, we were delighted with the study because it just opened a window into cost structures that have always been opaque and hidden,” Kramer said.