March 25, 2008
by David Wood*
Technology sectors have been remarkable not only in terms of their growth and the value they have contributed to the global economy but by the appearance of perpetual motion they bring to the markets they touch. Change is ever present in the online world. Acquisitions and consolidation have meant there has been a constant spur to product development and innovation arising from the integration of previously separate companies, and start-ups and new entry have provided a seemingly endless source of new ideas and talent.
It is fair to say that, overall, this activity has raised regulators’ eyebrows but has generated relatively few concrete antitrust concerns. In particular, the markets have seemed to be too fragmented and dynamic to raise concerns about excessive concentration of market power.
Furthermore, change has been so rapid and even unpredictable that regulators have been rightly cautious about putting forward their own views for how they see the markets developing. The fate of innovators such as AltaVista, Lycos and Excite show how fast and dramatically times can change.
Google’s acquisition of DoubleClick
One of the most significant recent events was the announcement in April 2007 that search giant Google intended to acquire leading online advertising company DoubleClick for a price of US$3.1bn (more than ten times DoubleClick’s earnings). This transaction has now been the subject of two in-depth antitrust reviews, one by the US Fair Trade Commission (FTC) and one by the European Commission’s antitrust department, DG Competition.
In these reviews, third parties–competitors, customers, politicians and consumer watchdogs–raised two main issues during the course of the investigations.
First, would the combined entity have the ability and incentive to restrict competition in online advertising markets, in particular by preventing other advertising intermediaries from having similar access to those markets?
Second, would the transaction lead to reduced pressure on Google to improve its data protection policies, the company having been widely criticised for its cavalier approach to individual privacy issues?
Advertising on the web
As in the traditional print world, online advertisers need online publishers and vice versa. Advertisers rely on publishers to provide an outlet for their adverts as well as for feedback on who gets to see the ad. In return, publishers rely on advertisers for a significant portion of the revenue they need to put together and distribute the work in which the ad is published. Putting advertisers and publishers together is an increasingly complex exercise, and reflects both variations in the value of the place where the ad is published as well as the marketing objectives of the advertiser.
On the web, there are two principal types of online advertising–search and non-search ads:
Search ads are the ads users see at the top of the search results or along the right-hand side of the page, together with search results, when they enter a word or phrase into an internet search engine.Search ads are selected based on the search term entered by the user, and sometimes also on data that has been collected about the user, such as the user’s history of prior searches.
Non-search ads are placed on that portion of its web space that a publisher sets aside to display ads.A website normally has a choice to sell this ad space (or ad inventory) either (1) directly to advertisers, in which case it will typically use specialised software (known as "ad-serving tools") to manage which ad will be displayed when, etc; or (2) indirectly, typically through an ad network or an ad exchange which matches inventory and advertising on an automated basis.
Google and DoubleClick: background
Google, through its AdWords business, is the dominant provider of search advertising, and most of its online advertising revenue is generated by the sale of advertising space on its search engine results pages. Google also provides an integrated ad-serving platform called AdSense, consisting of web publisher tools, advertiser tools and an ad exchange where inventory and ads are matched.
DoubleClick is currently the dominant provider of ad-serving tools to both publishers and advertisers. The tools are used to place ads on web pages following direct sales. They are also used in combination with third-party ad exchanges for deciding which ad networks will be given ad inventory that publishers do not sell directly to advertisers. DoubleClick does not sell search advertising.
Concerns about transaction
Third party concern about the Google/DoubleClick transaction was that, post-merger, Google would be able to move ad inventory from competing ad exchanges to its own services. It could do so through a variety of business strategies such as (for example) first-look techniques, giving DoubleClick tools away, entering into exclusive deals, or degrading performance of DoubleClick’s tools when used with competing ad exchanges.
As a result, the merged entity would be able to harm competing ad exchanges and strengthen Google’s dominant position in the sale of online advertising through ad exchanges. In addition, as sales of ad inventory through direct sales forces diminished and sales through ad exchanges increased (as a result of improvements in ad targeting), the merged entity would obtain a dominant position in the broader online advertising business.
In relation to privacy issues, the key concerns involve the collection and use of online user data. Between them, Google and DoubleClick have unique access to what are probably the two largest databases of online user data in the world. The merger would also give a single company an unrivalled ability to collect even more user data and assemble an even more comprehensive data library in the future.
A combined Google-DoubleClick would serve far more adverts on more websites than any other company in the world. This would make it very difficult for consumers to avoid confronting Google-served ads and thus nearly impossible to avoid the data collection and profiling that these advertisements would facilitate.
Furthermore, the harmful impact on competition in relation to online advertising which was expected to result from the transaction would weaken Google’s incentive to compete on the quality of its privacy practices. Google would have little reason to heed consumer demand for stronger privacy protections and would face no significant competitive pressure from other firms offering superior practices.
FTC analysis
On 20 December 2007, after an eight-month review, the FTC closed its Google/DoubleClick investigation. The FTC analysed three principal theories of potential competitive harm:
First, it sought to determine whether Google’s acquisition of DoubleClick threatened to eliminate direct and substantial competition between the two companies. It concluded that the companies were not direct competitors in any relevant antitrust market, eliminating the need for further analysis.
Second, the FTC examined the implications of Google’s continuing efforts to enter the third party ad serving markets where DoubleClick was already present.If these efforts had the potential to eliminate a competitor that was uniquely positioned to have a procompetitive effect on these markets, that would raise antitrust concerns. The FTC’s evidence showed current competition among firms in this market was vigorous, would belikely to increase and that, in any event, successful entry by Google would not be likely to have a significant impact on competition. Therefore, the elimination of potential competition also did not raise antitrust concerns.
Third, the agency evaluated whether Google’s acquisition of DoubleClick could harm competition by allowing Google to exploit DoubleClick’s position in the third party ad serving markets to the benefit of Google’s ad intermediation product, AdSense for example, by exclusively bundling its product with the acquired firm’s product after the acquisition. The FTC found that the evidence failed to show that DoubleClick has market power in the third party ad serving markets, and it was therefore unlikely that Google could effectively foreclose competition in the related ad intermediation market following the acquisition. The evidence also showed that it was unlikely that Google could manipulate DoubleClick’s third-party ad serving products in a way that would competitively disadvantage Google’s competitors in the ad intermediation market. Further, the evidence demonstrated that any aggregation of consumer and competitive data resulting from the acquisition was unlikely to harm competition in the ad intermediation market. These factors were found to resolve any competitive concerns related to these markets.
Although the FTC found no sufficient grounds to justifying blocking the transaction, it was unusually forthright in relation to the potential for future anticompetitive conduct and expressly stated that "we will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the Commission intends to act quickly".
The FTC declined to address the privacy concerns that had been raised by third parties on the basis that the FTC lacks the legal authority to block the transaction on grounds, or to require conditions to a transaction, that do not relate to antitrust. It added, however, that it takes consumer privacy issues very seriously, and referred to a set of proposed behavioural marketing principles that were announced at the same time.
The FTC voted to close the investigation by a majority of four-to-one, with Commissioner Pamela Jones Harbour voting against and issuing a dissenting statement. Commissioner Jon Leibowitz joined the FTC statement, but also issued a separate statement in which he noted "the serious vertical competition issues raised by Google’s proposed acquisition of DoubleClick as well as the substantial privacy issues that, though in part brought to light by the deal, clearly transcend it". In her statement, Commissioner Harbour wrote: "I dissent because I make alternate predictions about where this market is heading, and the transformative role the combined Google/DoubleClick will play if the proposed acquisition is consummated."
Commission clearance
On 11 March 2008, the European Commission announced that it too had cleared the acquisition of DoubleClick by Google on the basis that the transaction would be unlikely to have harmful effects on consumers, either in ad serving or in intermediation in online advertising markets.
The Commission found that Google and DoubleClick were not exerting major competitive constraints on each other’s activities and, therefore, could not be considered as competitors at the moment. Even if DoubleClick could become an effective competitor in online intermediation services, it was likely that other competitors would continue to exert sufficient competitive pressure after the merger. The Commission therefore concluded that the elimination of DoubleClick as a potential competitor would not have an adverse impact on competition in the online intermediation advertising services market.
The Commission also analysed the potential effects of non-horizontal relationships between Google and DoubleClick and found that the merged entity would not have the ability to engage in strategies aimed at marginalising Google’s competitors, mainly because of the presence of credible ad serving alternatives to which publishers, advertisers and ad networks could switch.
The Commission added that the decision was without prejudice to the merged entity’s obligations under EU legislation in relation to the protection of individuals and the protection of privacy with regard to the processing of personal data as well as under member states’ implementing legislation.
Remaining key questions
Although the FTC statements have been published in full (and its officials have started to comment publicly on the FTC’s investigation), the Commission’s decision is not expected to be made available for some weeks. Thus, unlike Google (which received the decision the same day), third parties will have to wait to digest its findings. In any event, even once published, confidential business information such as market shares will be excised from the public version.
There are, however, a number of key questions which remain to be answered but which can be identified at this stage:
Although Google has not offered formal undertakings to the Commission, what statements did it make concerning its future intended conduct?It was widely reported that commitments were made in relation to keeping separate the two databases and any such statements will, of course, have formed part of the Commission’s assessment.Third parties may not be able to enforce compliance on such points but they will be important in relation to ongoing scrutiny.
As part of its merger review, the Commission should have taken into account the likely deterrent effect of article 82 in determining the future competitive conduct of the parties.Once known, the Commission’s reasoning will be useful as an indication of where it is likely to focus its continuing attention on Google, if (like the FTC) it considers that this is required.
The Commission stated that its decision was without prejudice to issues related to Google’s existing and future level of compliance with data protection rules.However, we have not seen its reasons for excluding the consumer welfare aspects of privacy and data protection from the scope of its review.Again, this will be relevant to any ongoing antitrust scrutiny.
Merger analysis is predictive and is not easy in fast-moving markets such as these.The Commission did not share the views of third parties in relation to the relevant markets and it will be useful to compare its prognosis with events.If it proves that the Commission’s analysis has been too static or too prudent in other ways, a reassessment of the Commission’s analysis will have to be made.
Finally, in rejecting the premise of a single overall online advertising market, the Commission will have provided clarity on how it thinks narrower markets should be defined.This will be interesting as it will shed light on where (and to what degree) Google is dominant for the purposes of article 82.
For these reasons, it is likely that the Google/DoubleClick transaction will continue to raise the interests of antitrust regulators and third parties (including competitors). However, it will also catch the attention of others–such as customers, politicians and consumer watchdogs–who have an interest in competition policy regarding the online sector.
* David Wood is a partner in Gibson, Dunn & Crutcher LLP (Brussels). He represents the Initiative for a Competitive Online Marketplace (ICOMP), details of which can be found on its website. All views expressed are his own.
This has been reproduced with the permission of the publisher and originally appeared in the 25th March 2008 edition of CLI inBrief.
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