Explaining the antitrust case against the Google advertising industry

Last week, Google ended its defense in United States v. Google LLCa case brought by the Department of Justice that accused the tech giant of antitrust violations in its online advertising business, which accounted for $237 billion of the company’s 2023 revenue of $307 billion. The parties will now submit written summaries of the key facts in the case and deliver closing arguments in late November.

The three-week trial, held in federal court in Alexandria, Virginia, is part of a broader antitrust crackdown on Google’s business practices. In August, a federal judge in Washington ruled that Google’s search engine violated federal antitrust laws in a lawsuit brought by the Trump administration’s Justice Department. Last year, it was discovered that Google had illegally monopolized the app market in the Play Store following a lawsuit brought by Epic Games, the maker of the popular video game Fortnite. (On Monday, Epic sued Google and Samsung over related antitrust violations.)

After the closing arguments, Judge Leonie Brinkema will probably issue a ruling after several weeks or months. What happens next could result in big changes at Google that could impact the entire online advertising industry.

How does the online advertising industry work?

In the online advertising ecosystem, advertisers pay to have their promotional content displayed, while publishers – such as mobile apps, search engines and other websites – get paid to display these ads on their digital properties. Although some advertisers and publishers cooperate directly, many online advertising transactions take place through a complex, indirect auction system.

On the buy side, advertisers typically manage their ads through a network of advertisers. These networks aggregate the advertising inventory of many advertisers, which allows for more efficient distribution. On the sales side, publishers often use specialized ad servers to manage their advertising space, optimizing which ads appear and when.

Ad exchanges sit in between and are a marketplace where networks of advertisers bid on available ad slots from publishers in real time. Advertisers set the maximum prices they are willing to pay for certain ad placements or keywords, and exchanges run automated auctions for each ad slot, often in milliseconds when a web page loads. This process, called programmatic advertising, allows for precise targeting of consumers and theoretically effective placement of ads on the Internet.

What is Google’s role in the online advertising ecosystem?

Google entered the online advertising market in 2000, initially displaying ads only in search results. In the following years, Google expanded its services by partnering with publishers to display ads on third-party sites, helping advertisers reach a wider audience.

As the role of the buy-side in ad inventory management grew, Google began offering sell-side services to publishers to manage their online advertising space. In 2008, Google acquired DoubleClick, an ad technology company that controlled 60 percent of the publisher ad server market. The acquisition, which included the small but growing ad exchange DoubleClick, made Google, in the words of the Justice Department, a “buyer, seller and auctioneer” of online advertising. Consolidation gave advertisers access to more ad slots across the Internet and gave publishers a wider pool of advertisers, but it also allowed Google to exert influence on both sides of the market.

(Figure 5 from the Department of Justice complaint (paragraph 75))

Google has started to combine its services on the buyer, seller and exchange sides; publishers had to use Google’s exchange and sales services if they wanted to access its advertising network. According to the Department of Justice’s preliminary conclusion, as Google’s share of the online advertising market increased, Google artificially inflated prices for advertisers by passing on the inflated revenues (less a transaction fee to Google) to publishers, keeping them on the Google platform. Competing companies have had difficulty matching Google’s payouts to publishers. Google has also configured its seller-side services to offer its own exchange preferential terms, selling ad space to itself before making it available to other exchanges.

With the advent of new advertising technology, Google acquired some of its competitors, changed the terms of its contract to the detriment of those competitors, and terminated contracts with companies such as Facebook to direct more of its ads to Google. The Justice Department alleged that such conduct violated antitrust law.

In its defense, Google argued that its practices benefited a competitive market by creating tools used by others in the industry. The company also claimed that the amount it takes from each transaction it facilitates is lower than the Justice Department claims and, in some cases, lower than the industry average. Additionally, Google found that the Department of Justice defined the relevant market too narrowly. Economist Mark Israel, one of the company’s experts at the trial, testified that advertisers are shifting an increasing share of their advertising dollars to social media platforms, moving away from the type of open online display advertising that was at issue in the case. Google’s vice president of regulatory affairs said that 70 percent of online advertising is sold directly, rather than through exchanges like Google. Overall, Google has made clear that its practices are motivated by competition and innovation, not protectionism.

What is an illegal monopoly under federal law?

The government accused Google of violating Section 2 of the Sherman Antitrust Act, which was passed in 1890 to curb anticompetitive practices during the Industrial Revolution. The government must prove not only that the company had monopoly power – “the power to control prices or exclude competition” – in the relevant market, but also that it acquired or maintained that power through exclusionary conduct rather than through superior products or business practices. The Justice Department alleges that Google used its monopoly power to restrict competition by acquiring competitors, favoring its own platform over those of its competitors and bundling its services. Last year, during an unsuccessful attempt to dismiss the lawsuit, Google argued that it justified its actions by efforts to provide value to all participants in the ecosystem: publishers, advertisers and consumers.

Defining the relevant market is a key issue in antitrust cases. The broadly understood market makes it difficult to prove the government’s thesis. If the market were defined as “advertising,” the government would have to prove that Google had a monopoly on the market that included billboards, direct mail, and television and radio advertising.

In this case, the government proposed three separate markets, all limited to online intermediary sales in the United States: buy-side services for advertisers, sell-side services for publishers, and exchange services between advertisers and publishers. Google argued that the relevant market should be expanded to include direct advertising, closed advertising systems such as Amazon, as well as mobile, video and social media advertising markets.

What will happen next?

If Google loses, the Justice Department will recommend a remedy and a judge will issue a final decision. The most dramatic solution would be to dissolve the company or force the sale of some of its parts. Some argue that a breakup could actually increase the company’s total market value, as happened with Standard Oil in 1911.

There are many smaller remedies. A court may prohibit certain restrictive contract terms or business practices, such as exclusivity. In a recent antitrust case involving Google search engines, experts speculated that Google could be forced to terminate its contracts by making Google the default search engine, or it could be forced to license parts of its search engine business to other parties. In an antitrust case involving the Google Play Store, a judge is reportedly considering imposing changes to the company’s app store policies that will last for at least three years.

What does this case mean for the tech industry?

Even if Google loses, the impact may be limited. Innovation and markets often move faster than litigation, and generative AI is already disrupting the online advertising industry. Generative AI platforms haven’t yet figured out how to enable advertising, and if these platforms siphon a significant portion of traffic away from search engines and other websites, advertising in these places will become less valuable. A Justice Department expert testified that Google has already stopped all but one of its alleged anticompetitive practices.

The industry could change significantly before Google actually has to make any changes as a result of this case, especially if it appeals (the company has already announced it will appeal the August antitrust ruling on search engines). In 1999, Microsoft became a monopoly, but appeals and settlement negotiations delayed enforcement until 2002, when the company reached a settlement with the Justice Department.

How will the elections affect antitrust enforcement?

Earlier this year, before becoming former President Donald Trump’s running mate, Senator J.D. Vance praised President Joe Biden’s FTC Chairman: “I think Lina Khan is one of the few people in the Biden administration who I think is doing quite well, good job ” While antitrust policy has often been a point of contention between Democrats and Republicans, the parties are currently following a similar path. The federal government stepped up antitrust enforcement efforts starting in 2020 during the Trump administration. Under Trump, the Justice Department brought a search antitrust case against Google, and the FTC brought another against Meta (then Facebook), maintaining that its acquisitions of Instagram and WhatsApp were anticompetitive. The Biden administration continued to prosecute both cases and filed a case involving Google’s ad technology. The FTC and several states have filed additional antitrust lawsuits against large technology companies. If Kamala Harris maintained the Biden administration’s approach, there might not be significant differences between the Harris administration and the second Trump administration on antitrust law.

Others, however, argue that the FTC under a second Trump administration would be friendlier to mergers and acquisitions, which have faced greater scrutiny from the FTC and the Justice Department under Biden. Harris’ close relationship with Silicon Valley has led others to suggest that she may be less vigorous than the Biden administration on antitrust enforcement. Attorney Karen Dunn led Harris’s debate preparation team and delivered opening statements to Google the day before the Sept. 10 presidential debate earlier this month; this connection is currently being investigated by the House Judiciary Committee.

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