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Google’s Dominance of Online Display Advertising

October 21, 2013

Google has long been criticized providing the advertising dollars that fuel a large variety of bad behaviors online from selling illegal drugs, to human trafficking to plain old copyright infringement.  This is not mere Google bashing—remember, Google’s senior executive team paid $500,000,000 of the stockholders money to keep from being indicted for selling illegal drugs.  Google itself admits disconnecting 46,000 illegal sites from its Adsenses/Doubleclick ad networks—even if Google made a mere $10,000 each from those sites, that’s over $1 billion gross.

And who can forget the drubbing Google took from members of Congress and Firedoglake over the teen-oriented prostitution app on the Android platform as advertised on YouTube. (Not to mention the sugar daddy dating site and YouTube channel that is in the middle of the murder investigation of a Google executive.)

Why do they do these things?  Apparently for the money.

The hypocrisy of Internet utopians engaging in such behavior is striking—there must be an awful lot of money involved to make it worth the risk.  Which also is strange because we’ve also been led to believe that display advertising (the vast majority of Googe’s ads on pirate sites) doesn’t generate significant revenue on a per click basis.

The YouTube Effect

When it comes to a monopolist like Google, however, there’s always another possible explanation—the “YouTube Effect”.  When Google acquired YouTube, Google used its monopoly revenue from the text-based search vertical to extend and subsidize that monopoly into video search and now into a competitor to broadcast and cable television.  And of course used its text-based search results to favor its own YouTube product over other competitors until there are none left.

Now that we have the benefit of public documents like the Google nonprosecution agreement for selling illegal drug advertising and the Megavideo criminal indictment that confirmed the giant pirate site was an Adsense publisher, it is easier to understand why Google is so reluctant to just get out of these criminal business lines altogether.

Apparently for the money.

Watchful Waiting After the Doubleclick Acquisition

Google perfects its dominance over display advertising by using the assets it acquired in its 2007 purchase of Doubleclick.  When the Federal Trade Commission approved the Doubleclick sale to Google, the approval came with strings:

“The market positions of Google and DoubleClick suggest that the combined firm could engage in a number of potential anticompetitive strategies to further enhance its positions in the various markets at issue….We will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the commission intends to act quickly.”

One of those “anticompetitive strategies” includes the practice of tying, or bundling, products and services by a firm that has the market power to force their customers to acquire products or services together, i.e., so that the monopoly good is tied to another product regardless of whether the customer would prefer to get the tied product from someone else.

Google’s various products including YouTube, Android and Gmail are all monetized by Google’s advertising platforms, and one can anticipate that Google’s ability to maintain dominance in these product verticals (video, mobile and email)—not to mention its desires on dominating television—requires maintaining a dominant position in display advertising.  According to Bloomberg:

Google’s share of the display ad market reached 24 percent during the first quarter in the U.S. with its closest competitors, Yahoo! Inc. and Facebook Inc., each holding less than 10 percent market share, according to research firm IDC.

Facebook, the largest social-networking service, lost its lead to Google last year and is expected to expand its market share at a slower pace. Facebook will grab 16 percent in 2015, up from 15 percent last year and less than 3 percent in 2008, EMarketer, another research firm, estimates.

Google took 47 percent of total U.S. digital ad spending in the first quarter of this year, according to IDC.

Given that Google is constantly striving to increase its dominance in display, one can easily understand why having control over as much ad inventory as possible is a key concern, particularly if that inventory can be locked in—or tied—to the Google advertising platforms.

The Online Advertising Ecosystem

The ecosystem for display advertising online is at its core a simple attempt at matching buyers and sellers in a supply and demand relationship.  One would expect market forces to demand more simplicity and transparency over time.  But like the derivatives market as evidenced by Enron, credit default swaps and other “too big to fail” insider transactions, the trading market for display advertising has become more complex and opaque, more difficult for the average stock holder to understand.

Not to mention the average cop.

When participants pay a premium for secrecy, stockholders would do well to wonder what in the world is being done with their money.

Here’s a high level example:

The core transaction involves websites or “publishers” with advertising space or “inventory” and advertisers who have advertising to sell.

The Cola Company buys inventory (and audience) from Dimitri’s Kittens and Sunshine

Cola <——————-> Dimitiri

Cola gets the audience they want and Dimitri gets money

The Internet being God’s gift to middlemen, it should not surprise you that a middleman evolved between Dimitri and Cola, called the ad network.  Ad networks aggregate inventory and sell it to advertising agencies, whose media buyers are responsible for delivering the brand’s audience.

Notice what has happened here:  The brand is no longer directly connected to the publisher.  So the brand is now relying on their advertising agency to deliver the audience as represented to them by the ad network.  The brand pays the ad agency who takes a markup on advertising it buys from the ad network that takes a commission from Dimitri.

Right about this time, Dimitri realizes he can make a lot more money if he has more inventory, so he goes to his cousin Vlad who runs Ass Kicking Torrents out of Bulgaria.  He redirects his site to Vlad and no one is the wiser at the ad network because he’s now able to deliver the key demographic that Cola’s ad agency wants.  The ad network is happy because the business in kittens and sunshine seems to be very good and the network makes more money.

The ad agency is happy because they get the audience they want and make more money from the increased inventory.  The brand is none the wiser and is happy to keep paying for the audience they want—assuming that they were interested in that segment of the audience that fit the demo but also was being served ads while engaged in real time shoplifting.

But nobody tells them that.

To be continued in Part 2: Google’s end to end dominance of online advertising.

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