Executive Summary

• On Thursday, a federal district court ruled against Google in a highly anticipated antitrust case stemming from concerns with the firm’s control of online advertising.
• In particular, the court found that Google illegally monopolized the publisher ad server and ad exchange markets for open-web display advertising primarily by tying the use of its publisher ad servers to its ad exchange service, ultimately with the goal of harming competitors.
• Google will likely appeal the decision, arguing that the court should have considered the advertising market as a single, two-sided market rather than individual, single-sided markets, and that its practices actually improved its services and benefited its customers.
• Regardless, the case demonstrates that current antitrust law and standards can fully protect competition and consumers, and it could also dampen calls for broader reform to antitrust laws that seek to target concentration as a per se harm.

Introduction

On Thursday, the United States District Court for the Eastern District of Virginia ruled against Google in a highly anticipated antitrust case that primarily stemmed from concerns about Google’s control of online advertising. In particular, the court found that Google illegally monopolized the publisher ad server and ad exchange markets for open-web display advertising. First, the court held that Google had the power to control prices and exclude competition in these markets, relying both on market share (with sufficient barriers to entry) and more direct evidence that Google could control prices without customers switching to an alternative. Second, the court found that Google illegally tied its ad publisher servers (DFP) to its ad exchange (AdX), as well as implemented features such as a right of first refusal that, the court found, degraded the service and made it more difficult for rivals to compete.

Google will likely appeal the decision. At trial it argued that the advertising market should be considered more broadly, but the district court largely dismissed this argument. On appeal, Google will likely reassert these arguments and further argue that these markets should be viewed as a single, two-sided market. Further, much of Google’s criticized conduct could be considered pro-competitive, such as by allowing Google to improve safety and privacy, counter fraud, reduce latency, and ultimately decrease prices. On appeal, the firm may try to reassert that these benefits outweigh anticompetitive harms and thus the conduct is not illegal.

Apart from the direct effect on Google’s advertising business, the case was largely grounded in existing precedent and principles of Sherman Act analysis, and thus will likely not significantly alter future cases. If anything, the case could highlight that calls to reform the consumer welfare standard are unnecessary, as existing antitrust law and standards protect competition while allowing businesses the freedom to create efficiencies that can benefit consumers.

Background: Google and Ad Tech

Advertising plays a critical role in the internet economy, as most websites do not charge a use fee, but rather raise revenue by selling advertising space. Advertisers buy what are known as impressions, which are essentially a display of their ads to a website’s users. The American Action Forum previously published an insight on how digital advertising works.

Relevant to this case, Google competes in all three layers of the ad tech stack. First, for websites trying to sell advertising space and viewer impressions, Google offers its publisher ad server (DFP), which issues requests for advertiser bids for publisher ad space. Second, for advertisers, Google offers both Google Ads and Display & Video 360, which provide bids to the publisher ad servers for advertising on a website. In between it all, Google Ad Exchange (AdX) connects publishers and advertisers, including Google’s own services.

Under this arrangement, Google can offer firms on both sides of the exchange access to a wide range of partners and better target the needs of its clients by providing an all-in-one offering, so to speak. Yet this offering also raises competitive concerns, for if Google has monopoly power in any one market, it can leverage that monopoly power to harm competition in other parts of the ad tech market.

The Courts Decision

To succeed on its Section 2 Sherman Act claim, the Department of Justice (DOJ) needed to show that Google both had monopoly power in a relevant market and used anticompetitive means to acquire or maintain that monopoly power.

Element 1: Monopoly Power

The court found that Google had monopoly power in two markets: the ad publisher market for open-web display ads and the ad exchange market for open-web display ads. Notably, the court found that these constituted distinct markets, rather than simply components of broader ad markets because these types of services are not reasonably interchangeable with other services (such as a service that targets advertising on mobile apps or alternative means of advertising online such as direct deals with a website). The court was unpersuaded by Google’s argument that online advertising should be examined as a single two-sided market rather than two distinct single-sided markets, distinguishing previous Supreme Court precedent on the grounds that other single two-sided markets like credit card transaction platforms only involve competition among other competitors in the two-sided market. Here, Google competes with firms operating in each individual market.

In the two markets, the court found that Google has the power to control prices or exclude competition. First, it found that Google’s significant market share, in addition to the high barriers to entry, gave an inference that Google has monopoly power in these markets. Second, it found that certain actions by Google, such as Unified Pricing Rule changes that limited the ability for a publisher to set a higher price floor, degraded the service – and, of note, that Google had no fear that publishers would switch away from its services. The court also found more direct evidence of monopoly power in the ad exchange market, where Google has increased prices compared to its rivals, and could continue to do so, as enough customers would not switch to alternative ad exchanges.

Element 2: Anticompetitive Conduct

In addition to monopoly power, the DOJ must have also showed that Google willfully acquired or maintained that monopoly power through anticompetitive means rather than “through ‘conduct [that] is procompetitive and thus increases consumer welfare,’ such as by having developed ‘a superior product’ or grown due to ‘business acumen,’ or if Google’s monopoly power has resulted from other ‘valid business reasons,’ or ‘historic[al] accident.’”

The anticompetitive conduct in this case fell into three categories: acquiring competitors such as DoubleClick, illegally tying DFP to AdX to lock in publishers to Google’s products, and using a series of anticompetitive policies and practices to entrench its position and harm rivals’ scale. The court focused primarily on the latter two, because in isolation it found the acquisitions were not anticompetitive. With regard to tying, the court found that the restrictions and limitations imposed by Google on customers using just DFP and not Google’s AdX effectively required these customers to use both products, and that Google possessed sufficient economic power in the tying product market to restrain competition in the tied market.

The court also ruled that a variety of Google’s practices were not in Google’s customers’ best interest but rather entrenched the firm as the dominant company in open-web advertising. For example, First Look required publishers using DFP to offer AdX a first right of refusal for each ad impression, making it more difficult for advertisers to do business with Google’s rivals. Similarly, Last Look gave AdX the ability to look at competing exchanges bids, allowing Google to win auctions it would otherwise lose and enhance AdX market power at the expense of its rivals.

Next Steps and Policy Implications

Google will likely appeal this decision on multiple grounds. First, it can argue the market definition was too narrowly focused on open-web ads and not advertising on a larger scale, as well as arguments that the two-sided market analysis of the American Express case should apply to the ad tech market. If the market is broadened, Google could show it lacks the ability to control prices or restrict rivals. Second, it will argue that the conduct the court found anticompetitive actually benefited consumers and competition, in particular with regards to improving safety and privacy, countered fraud, reduced latency, promoted investment improving the overall service, and decreased prices. For example, its First and Last look features could result in larger revenue for Google’s publisher customers and gave its advertisers more opportunities to bid. Finally, Google will likely re-raise arguments that it has no duty to deal with its rivals, which the court dismissed because existing precedent focuses on restraints placed on competitors and not customers.

In addition to an appeal on the merits, the court must consider remedies. Considering ongoing requests by the DOJ in the Google Seach case for structural separations, the Trump Administration will almost certainly look to break up Google’s ad tech businesses so that the firm doesn’t operate in multiple sides of the ad tech market. The DOJ could also seek behavioral remedies that eliminate some of the practices the court found anticompetitive, such as the First and Last Look features.

But apart from the direct effect on Google, it is unclear what effect this case will have on the larger competition policy discussion. It may highlight that the consumer welfare standard and existing antitrust laws fully protect competition and consumers, and broader calls for reforms to target concentration as a per se harm are unnecessary. While Google will likely challenge factual and legal determinations, the court generally relied on well-established principles such as product substitutability when defining the market and existing precedent on tying when finding anticompetitive restraints. Proposals to alter antitrust laws to forgo this analysis, however, could result in procompetitive conduct and growth becoming illegal per se, to the detriment of consumers and competition as a whole.