Part 28 - Google Imposes So-Called Unified Pricing Rules to Deprive Publishers of Control and Force

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

D. Google Responds to the Threat of Header Bidding by Further Excluding Rivals and Reinforcing Its Dominance

2. Google Blunts Header Bidding By “Drying Out” the Competition

e) Google Imposes So-Called Unified Pricing Rules to Deprive Publishers of Control and Force More Transactions Through Google’s Ad Exchange

231. Poirot was incredibly effective at redirecting DV360 advertiser spend away from rival ad exchanges, and putting Google’s ad exchange back on the road to acquiring monopoly power, notwithstanding the opening that header bidding had briefly created for competition between ad exchanges. The fraction of DV360 spend on AdX increased from approximately 40% to 70% due to Project Poirot. An internal Google document fretted that “Adx is now dominant to the point where we need to communicate to advertisers (and sometimes even to ad exchanges) why over 70% of [DV360] spend happens on Adx.”

232. But Google was not satisfied. Despite the dramatic shift of DV360 spend to AdX and away from rival ad exchanges, Poirot was not quite as effective as they thought it should be, given how much Google had stacked the deck in favor of its ad exchange. One Google Engineering Director noted that while Poirot had made progress on shifting spend to Google’s ad exchange and away from rival ad exchanges, “we need to do more.” A review of publisher data from Google’s ad server and Open Bidding—information effectively covering the sale of nearly all open web ad inventory—quickly identified the problem: Google’s publisher customers. Google employees realized that publishers were using pricing controls built into the publisher ad server to set the terms on which their inventory was sold to advertisers, including by setting different minimum price floors for different buyers. Google perceived publishers’ ability to steer ad sales to rival ad exchanges, and to control who bought their ads and at what price, as a threat to Google’s ability to control the flow of transactions.

233. Within Google’s publisher ad server, publishers were able to set different price floors for specific exchanges or advertiser buying tools. For example, a publisher could set a price floor of $2 for Google’s ad exchange and $1.80 for the competing ad exchange, OpenX. If OpenX submitted a winning bid of $1.85, and Google’s ad exchange had a buyer willing to pay $1.90, the inventory would still be sold to the OpenX advertiser because Google’s AdX ad exchange failed to clear the minimum price set by the publisher for AdX.

234. There are many reasons why publishers might want to set non-uniform price floors for different exchanges or advertiser buying tools. Publishers have relationships and deals with advertisers, agencies, and ad exchanges that have implications beyond the sale of a single impression. For example, a publisher might want to boost an ad exchange’s chances of winning a particular impression in order to reach previously negotiated volume discount thresholds. Additionally, some publishers might set a higher price floor for Google’s ad exchange than for a rival ad exchange to account for publisher-specific preferences for a particular ad exchange, the quality of advertiser demand, better advertisement load rates, and data advantages. Some publishers also wanted to mitigate risk from overexposure to a single exchange (such as Google’s ad exchange) or to avoid conflict with direct sales channels. For all of these reasons and others, the ability to set different floors for different ad exchanges or advertiser buying tools was an important tool that publishers used to manage these partner relationships and direct the sale of their own inventory to maximize their overall business objectives.

235. Google recognized that the ability to choose different floors for different ad exchanges or buying tools was a DFP feature that publishers valued. One Google Senior Product Manager explained to his colleagues: “The general idea is that the pub[lisher] doesn’t care about maximizing revenue on every individual query – they want to maximize revenue for their overall business, and that might mean sacrificing a few pennies of lost indirect revenue” on a single transaction. Similarly, Google’s Director of Global Partnership and Publisher Solutions explained: “Pub[lishers] are also rational[] when they decide to diversify their source of revenues” using floors given that “[i]t help[s] them to keep Google at bay and put pressure on us (similar to any industry).” By using different price floors, publishers expressed a willingness to occasionally accept a slightly lower price from a rival ad exchange than from Google’s ad exchange for the same inventory. But publisher controls and goals mattered little when they conflicted with Google’s desire for increased market share and profits. Google refused to tolerate a system in which publishers exercised control over their own inventory.

236. Even before Poirot, Google had noticed that some publishers used price floors to direct the flow of certain transactions to rivals. In response, Google had insisted on “equal footing” clauses in certain publisher contracts, which ostensibly prevented publishers from offering inventory to competitors on more favorable terms or at lower prices than those offered to AdX. However, these contractual provisions were difficult to monitor and enforce even for the small number of publishers for which they applied. Confronted with a broader concern about the operation of price floors in the wake of Poirot, Google developed an alternative approach that was blunt but effective: Google simply removed the existing feature in its publisher ad server that allowed publishers to set different floor prices and preference rival ad exchanges or buying tools. Going forward, only Google, not its customers, would be permitted to dictate preferences, and only those preferences that advanced Google’s strategic ambitions would be tolerated.

237. Recognition of the flooring “problem” was widespread within Google’s display advertising leadership. When one Google employee asked why DV360 was still winning inventory through rival ad exchanges, Google’s Project Poirot architect explained that “the best guess is that the AdX [price] floors are higher.” He went on to note that “[t]his is one big problem for the Adx team to try fixing so that more of the [DV360] buying will switch to Adx.” He suggested that “if we figure out how to equalize floors (i.e., get the Adx floors down), as a buyer, we will start seeing benefits in terms of buying more through Adx and decreasing incrementality on 3PE” (third-party ad exchanges). As usual, Google did not care what was best for its customers; Google insisted on doing whatever was necessary to decrease spend on AdX’s competitors, thereby denying them the scale and competitive position to threaten Google’s AdX monopoly.

238. Google’s internal analyses of the pricing floor practice demonstrated the extent of the “problem.” Google believed its AdX ad exchange was already winning 66% of auctions where an ad exchange used header bidding, but for a little less than half of the inventory it did not win, Google’s AdX had a higher bid than the rival ad exchange that did win. The AdX ad exchange was losing these auctions because publishers had configured price floors that awarded the inventory to a rival ad exchange or rival demand source at lower per-impression prices than AdX and/or Google Ads offered in certain auctions. In response, Google went to work to block publishers from setting price floors that disadvantaged its AdX business.

239. In March 2019, Google announced a number of changes to its publisher ad server and ad exchange. Among the notable changes were the removal of granular publisher price controls from the ad server. In their place, Google required publishers to set a single floor price for inventory that applied to all ad exchanges and advertiser buying tools. Google called these degraded pricing controls Unified Pricing Rules, or UPR. Unified Pricing Rules were the culmination of Google’s work to stop publishers from using ad exchange-specific or buyerspecific price floors to steer transactions to rival ad exchanges and away from Google’s ad exchange and buying tools. Under Unified Pricing Rules, publishers were no longer allowed to set different price floors for Google’s ad exchange or advertiser buying tools versus other ad exchanges or advertiser buying tools.

240. Google recognized this product change came with a number of “major risks,” including “(1) revenue drop for some pub[lishers][23] (2) negative pub[lisher] reaction (loss in ability to set per-buyer floors) (3) negative adv[ertiser] reaction (potential for DV3[60] spend share ↑ on AdX).” Internal experiments found that UPR increased DV360 and Google Ads’ spend on AdX and decreased spend on rival ad exchanges. One analysis found that UPR caused DV360 to win approximately 32% more impressions on AdX and led to a 6% increase in AdX revenue.

241. Google bundled its imposition of Unified Pricing Rules with other changes to provide cover. As one employee explained, Google “bundled . . . a bunch of contentious changes,” such as the “overhauled pricing rules,” with less objectionable changes “to make the contentious ones more stomachable.” For example, Google changed its ad exchange from a second-price auction to a first-price auction, which altered some of the ways price floors impacted auctions. Google used the auction format change to contend that the only legitimate reason for differential price floors in its view—to increase the clearing price of a second-price auction—had been eliminated. Google also claimed that the granular price control feature of its ad server only confused its publisher base—even the sophisticated publishers most likely to use price floors. Google asserted that it was doing those customers a favor by eliminating the function.

242. In reality, Google’s internal documents demonstrate that these were pretextual justifications for the true driver of Unified Pricing Rules: preventing publishers from preferencing rival ad exchanges. Google employees candidly acknowledged that the change in auction format alone “would have achieved most of what we desperately need to fix our ecosystem,” irrespective of changes to price floors. But the Google ad exchange “team wanted to use this migration [to a first-price auction] as an opportunity to significantly limit the ability of publishers to set floor-prices per buyers (which is a good goal to have).” Externally, Google told publishers and others that the combined changes would “simplify programmatic buying,” “reduce complexity and create a fair and transparent market for everyone.” Internally, Google acknowledged that getting rid of higher price floors for Google’s ad exchange was the “primary internal objective for the entire launch” of bundled changes and its “key driver.” Internal Google documents explained that the changes “will be a shift in DV360 spend patterns away from [thirdparty ad exchanges].” Not surprisingly, internal Google documents identified the “winner” of the new rules to be AdX, its own ad exchange, and accurately listed rival ad exchanges to be the “losers” under the new rules.

243. Publishers were livid when Google announced the change. At an April 18, 2019 meeting with Google, publisher customers lashed out. Google’s meeting notes reflect that publishers reiterated what Google already knew: “optimizing yield is important but CONTROL is also important.” Publishers “laugh[ed]” when Google employees tried to push the farce that “we [Google] don’t want to take control away” from publishers. Publishers informed Google that “we can give you 1,000 reasons why we want buyer rules” and pointed out that “maybe flooring doesn’t have to do with ‘pure yield’ but might be needed for ‘business reasons.’” Notwithstanding the clear value the pricing rules provided publishers, Google’s own desire to prevent publishers and rival ad exchanges from circumventing the effects of Poirot won the day. Google refused to make any changes to the proposed Unified Pricing Rules. Because it had a publisher ad server monopoly, Google did not need to be responsive to its publisher customers’ needs; Google was confident that there was nowhere else for them to turn.

244. By 2019, effectively all viable publisher ad server competitors had exited or were in the process of exiting the market. Even if an alternative publisher ad server had remained, it could not have provided publishers access to the substantial and unique Google Ads’ advertiser demand that remained available almost exclusively through Google’s ad exchange.

245. With Unified Pricing Rules, Google exercised its market power to intentionally degrade the quality of its publisher ad server at the expense of publisher customers. It did so to prevent publishers from choosing to transact more through rival ad exchanges, further inhibiting the ability of these smaller ad exchanges to gain needed scale and compete effectively. Google reduced the share of other ad exchanges not by making its own ad exchange more attractive to publishers but, rather, by preventing publishers from preferencing other ad exchanges and by refusing to allow rival ad exchanges to compete for transactions on any dimension other than per-impression price. At the same time, Google shifted those transactions to its own ad exchange, further boosting Google’s profits derived from its supra-competitive revenue share fees, at the expense of both advertisers and publishers. Likewise, publishers could no longer set lower price floors for particular demand source partners, such as non-Google advertiser ad networks, which reduced the possibility that publishers could partner with a rival to challenge Google Ads’ dominance. Publishers were—and today still are—powerless to respond given the lack of viable substitutes to Google’s publisher ad server monopoly. They are locked into Google’s publisher ad server and subject to Google’s dictates about how they should monetize their own inventory.

246. Google fully launched Unified Pricing Rules in September 2019. As expected, UPR succeeded in shifting transactions away from rivals and to Google’s ad exchange. The market share of Google’s ad exchange increased by approximately 6% in 2019 following the announcement and ramp-up period. Google’s advertiser business also benefited: the average floor price faced by Google Ads’ advertisers on Google’s ad exchange dropped from a little over $3 to about $1. Of course, had Google Ads bid for inventory through ad exchanges other than AdX, Google Ads’ advertisers might never have faced the higher floors applicable to Google’s ad exchange in the first place. They would have faced the floors that publishers chose to apply to rival ad exchanges. Google’s internal modeling found that the Unified Pricing Rules created the “primary benefit” of Google’s bundled auction changes, and the “best guess” of the impact was an annual increase of $430 million in Google’s gross revenues and $118 million in Google’s net revenues.

247. Most importantly for Google’s overall strategy, Unified Pricing Rules had a “negative effect on 3P SSP [ad exchange] spend.” For example, one ad exchange competitor complained to Google that its win rate had decreased 6% during the launch of Unified Pricing Rules. Internally, Google employees attributed the decrease to Unified Pricing Rules and warned others not to share this “extremely sensitive” information externally. By the end of 2019, Google’s ad exchange was “still retaining [the] largest and growing share of spend” for inventory sold via open auction.

[23] Some publishers were able to achieve greater total revenue by flooring different ad exchanges and demand sources at different prices.