Google Manipulates Its Fees to Keep More High-Value Impressions Out of the Hands of Rivals

IV. GOOGLE’S SCHEME TO DOMINATE THE AD TECH STACK

4. Google’s Dominance Across the Ad Tech Stack Gives It the Unique Ability to Manipulate Auctions to Protect Its Position, Hinder Rivals, and Work Against Its Own Customers’ Interests

b) Google Manipulates Its Fees to Keep More High-Value Impressions Out of the Hands of Rivals

137. As Google’s publisher ad server monopoly was being cemented, Google’s focus shifted to ensuring its ad exchange rebuffed growing challenges from rival ad exchanges. Recognizing that Google Ads still faced little competition for most impressions it won on AdX, over time Google adjusted its fees—and in turn its bids—to ensure it could win more high-value transactions while paying less for lower-value transactions. By owning both the dominant publisher ad server and the dominant ad exchange, Google had unique access to the price data it needed to make these adjustments in a way that ensured more transactions, revenue, and profits flowed to Google—and in particular its Google Ads’ ad network and ad exchange—with minimal risk to Google.

138. First, in January 2013, through a program called Dynamic Revenue Share, Google adjusted the way Google Ads took its revenue share fee from a fixed 14% take rate on each impression sold to a changing, or dynamic, fee that averaged 14% per publisher over time. This allowed Google Ads to effectively increase its bids in competitive auctions (by taking a lower expected fee) and make up the losses by setting a higher expected fee on non-competitive auctions. This change reinforced Google’s ability to win more transactions on its ad exchange than could rival ad networks or demand-side platforms, augmenting the advantages Google already afforded its ad exchange through dynamic allocation, without the need to compete by reducing its fees.

139. Second, later in 2013, Google implemented Project Bernanke,[15] which doubleddown on Dynamic Revenue Share by subsidizing bids (i.e., bidding above the advertiser’s willingness to pay) on competitive impressions, thereby sacrificing any profit on the transaction. Of course, Google ensured that its own margins would be maintained. Google offset any loss on a given transaction by charging much higher fees (i.e., 50% or more) on impressions where Google Ads faced no competition—the majority of impressions Google Ads had already been winning. In doing so, Google Ads and AdX were able to win more impressions over their respective rivals, increasing Google Ads’ spend by 20% and profits by 30%, and increasing overall ad exchange revenue by 8%. A Google simulation of the program confirmed that advertisers using non-Google buying tools won fewer of the coveted high-value impressions, decreasing their relatively smaller spend on AdX by 14%.

140. Finally, in 2014, Google implemented Project “Global Bernanke” which changed the method by which Google calculated the Google Ads’ take rate (sometimes referred to as “margin”). Instead of applying the same take rate to each publisher’s ad inventory, Google took an average take rate at the ad exchange level. Google took a higher cut of advertiser spend for some publishers while taking less for others. The effect was to further shift the publisher benefits of Google Ads’ two-bid system to the most important publishers and away from “noncompetitive” publishers (i.e., publishers whom Google believed were unlikely to risk switching to a rival ad server). Google candidly acknowledged that by 2014 it was not worried it might lose “non-competitive publishers.” As one document explained, it is “unlikely they can do better on another network (which doesn’t have any [Google Ads] demand).”

141. The Google-generated graphic below shows Dynamic Revenue Share and Project Bernanke in practice. After running its internal auction (as described above), Google Ads calculates its two highest bids on a CPM basis as $1.00 and $0.96 (the gray bars). These bids might be similar because they are based on the same Google targeting data. Applying a uniform 14% take rate (or “margin”) would result in bids equal to $0.86 CPM and $0.83 CPM. With dynamic revenue share, Google adjusted the bids to $0.95 CPM and $0.83 CPM (the red bars in the Figure). For Bernanke, Google raised the first bid even further (sometimes substantially), as the first bid determines the winner of the auction. By raising the first bid (here from $0.95 CPM to $1.20 CPM, the green bars), Google Ads won more auctions, either clearing publishers’ reserve price more often or winning against a rival’s bid for competitive impressions.

142. By manipulating the auctions in this fashion, Google was able to subsidize the inflated advertiser bids by dropping the price of the runner-up’s bid (here from $0.83 CPM to $0.48 CPM). Where an auction was not competitive—the majority of auctions that Google Ads won—the lower price was the one Google Ads paid for the impression. Google then kept the margin (an estimated 50% in the example) to subsidize competitive queries. In this example, instead of the website publisher receiving $0.83 CPM for the advertisement, it received only $0.48 CPM for the impression under Bernanke, assuming only Google Ads’ advertisers submitted bids. A similar drop in price would occur for other “non-competitive” impressions. At the advertiser level, Google aimed for the same average take rate for each Google Ads’ advertiser: a 32% difference between what the advertiser paid to Google and what Google ended up paying to publishers for all of the impressions that the advertiser purchased. [16] Bernanke increased the number of transactions that Google won through its platforms, and in turn increased Google’s overall revenues and profits while denying scale to competing ad exchanges.

143. Project Bernanke allowed Google Ads to continue to pass along additional revenue to publishers on Google’s platforms (the only place it ran) but did so disproportionately relative to the competitiveness of the publisher. In doing so, it won more high-value impressions on Google’s ad exchange and reinforced the stickiness of Google’s ad server for key publishers. Other ad exchanges and ad servers that lacked a captive source of advertiser demand whose bids they could manipulate were unable to subsidize important publishers in the same way, presenting another roadblock to entry or expansion in the publisher ad server and ad exchange markets. For their part, while Google Ads’ advertisers won some additional competitive impressions, they did not receive the full benefit of the lower prices Google Ads paid for non-competitive inventory. Moreover, Google did not disclose to advertisers that it was shifting savings away from them to increase its own margins. In effect, Google fended off competition that could have challenged its monopoly power to force advertising transactions through its own ad tech products and limited publishers’ and advertisers’ ability to multi-home with rival products while still being able to maintain its high overall margins. In essence, a win-win, but only for Google.

144. In terms of its impact on competition, Google’s dynamic allocation and dynamic revenue sharing programs functionally made price competition among rival ad exchanges obsolete because no rival had sufficient scale across the ad tech stack to compete against Google. Google could effectively afford to charge nothing where it wanted to obtain high-value inventory because it had the ability to make up the difference on the back end with less valuable inventory.

[15] Project Bernanke was named after former Federal Reserve Chairman Ben Bernanke because it resembled “quantitative easing on the Ad Exchange.”

[16] Google Ads’ advertisers specify a maximum cost-per-click they are willing to pay. Google charges advertisers a fee on top of the price that Google pays for publisher inventory. The result is often less, and “sometimes much less,” than the advertiser’s specified maximum.