The dominance of Google

Federico Etro

30 January 2011

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Google made $28 billion on advertising in 2010; 23% more than in 2009 (according to their financial table). This sort of booming success is attracting the attention of antitrust authorities who worry about Google’s dominance in the market for online advertising.

  • In November 2010 the European Commission has started an investigation on potential abuses concerning the preferential treatment for Google services in its free search engine, the manipulation of the pricing system for the sponsored links, and exclusivity clauses or other restrictions for advertisers using Google services (see the European Commission press release here).
  • Complaints have been also filed in front of the US, German, and Italian authorities, mainly regarding unfair competition with publishers and other content providers.
  • The French competition authority has also carried out a consultation concluding in December 2010 that “Google holds a dominant position on the advertising market linked to search engines” and that “competition law can apply limits to Google's actions and provide a response to the competitive stakes brought to light by the actors, without the need to implement sector-wide regulations.”(see here)
  • Some constraints to the activity of Google have been decided also in Italy in January 2011, but the main antitrust debate will take place at the EU level.

Given all this, it seems important to understand the structure of online advertising and reasons for which Google may be engaged in abusive conducts.

The market for online advertising

Online advertising is one of the fastest growing global markets (Evans 2009). Companies spend over $600 billion worldwide on brand recognition annually. Today, only around 13% of that total is spent on online advertising, but the figure is set to grow fast, at least for the following reasons:

  • the Internet is rapidly growing and the large majority of websites generate revenues from advertising;
  • other devices as mobiles and TV will be always more often connected to the Internet;
  • software innovation allows more efficient mechanisms to reach targeted consumers, today on the basis of the characteristics of search (keyword bidding system) and of the same websites (contextual advertising), in the near future on the basis of the characteristics of the Internet users as well (behavioural advertising).

Google is the leading search engine in the world; its global share of search traffic is around 85 %. For comparison, Yahoo! and Bing have 7% and 4% respectively, according to Netmarketshare. Google’s lead is even greater in Europe.

In addition to its edge in the search market, Google dominates the lucrative business of placing text ads next to search engine result. Google AdWords accounts for about 70 % of search advertising revenue worldwide.

How Google prices its AdWords adverts

Payments are based on so-called Vickrey auctions for keywords with potential advertisers bidding on keywords that they think will increase the chance that Internet users will come to their web page by clicking on their advertisement.

Google typically charges for each click on the ad (cost per click), and the highest bid for each keyword association wins (with the price given by the second highest bid). The auction process is made more complex by the different positions that an ad can take in the search page, and remains largely obscure to the advertisers and competitors.

The lack of transparency of this pricing and ranking scheme can easily hide abusive forms of exclusionary behaviour, predatory strategies against competing services specialised in providing users with specific online content (price comparisons), price discrimination or even exploitative pricing toward selected advertisers.

Potential for exclusionary behaviour: The Navx example

For instance, an exclusionary behaviour emerged when Google suspended the AdWords account of a French company of online services (Navx) and was subsequently forced by the French antitrust authority to re-establish the account (June 2010). These and other forms of manipulation of the pricing system for the free and sponsored links should be carefully investigated at the EU level.

In recent years Google has introduced new services, some of which raise serious concerns about copyright protection (Google Books), privacy (Youtube and Google Maps) and also antitrust law. This is particularly evident in terms of predatory pricing or free riding against content providers, whose information is freely aggregated and displayed by Google News. On this front, the Italian and French competition authorities have forced Google to guarantee that press publishers will be able to request and obtain exclusion from Google News, but without being delisted by the general search. Similar agreements should be extended to the rest of Europe.

Dominance in display advertising

The second field of dominance of Google is in display advertising. Google leads the industry in directly placing banner ads on third-party publishers, accounting for three quarters of the direct channel that is the valuable ad inventory that large web publishers directly negotiate with the advertisers.

Of course, a lot of the advertising space available on large websites and all of the space available on small websites cannot be sold in direct negotiations. Therefore, most advertising is typically sold through indirect intermediaries that buy the so-called “remnant” ad inventory from publishers and sell it to advertisers.

Google plays a major role also in this market for intermediation services, providing a vertically integrated platform between online web publishers and advertisers: Google's AdSense reaches more than 80% of the ad revenue in the indirect channel with integrated ad networks. The Google platform targets advertising to the relevant websites (so-called “contextual advertising”) and pays the web publishers with a percentage of its revenues, but in the absence of any audit or data certification available for the same publishers. Meanwhile advertisers buy inventories from the platform through a bidding system characterised by the same lack of transparency mentioned above.

Through these services, Google controls at least 80% of the worldwide market for display advertising, and, as confirmed by the sector inquiry of the French antitrust authority, is protected by high barriers to entry.

Alternatives can be hardly offered to publishers using Google’s services. Switching to a different publisher tool involves high sunk costs in terms of substantial investments in software, in training the staff, coding all of the publisher’s web pages, creating novel datasets, transferring ad campaigns to the system and so on, with all the associated business risk. For the same reason, multi-homing (with multiple non-integrated ad networks) is highly inefficient in this case. The high switching costs, together with the difficulty of building alternative high quality intermediation services in the short run represent a substantial barrier to entry of new firms in the short and medium run, which is the relevant time frame in such a rapidly evolving market. This leaves space for multiple potential abuses by the dominant firm, including exploitative pricing on advertisers (with negative indirect consequences on all sectors depending on advertising), exclusivity clauses for advertisers using Google services and restrictions that Google can place on advertisers that wish to use the services of competing platforms.

Given all this background, it is easy to see that an in-depth investigation by the EU antitrust authority is welcome. The world needs to discern if and where Google may have abused its dominant position.

References

David Evans (2009), “The Online Advertising Industry: Economics, Evolution, and Privacy”, Journal of Economic Perspectives, 23(3),Summer:37-60(24).

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Topics:  Competition policy

Tags:  Google, EU Competition Commission, online advertising

Full Professor of Economics, University of Venice

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