The case against Google hinges on an antitrust “mistake”.

More than a century later, the American Trustbusters prepare for battle with another giant in the network industry. In January, the Department of Justice (DOJ) filed a 155-page complaint against Google for monopolizing digital advertising on exchanges. It is alleged that Google used coercive tactics to shut down the ed-tech business. The case has been presented as the biggest antitrust challenge to tech since the doj’s epic battle with Microsoft in the late 1990s.

Central to the case is Google’s acquisition of DoubleClick in 2008, which played a pioneering role in marketing the digital-advertising space. It has become an article of faith among regulators that the Federal Trade Commission (FTC) should have blocked the merger. As if to compensate for this laxity, Trustbusters has recently sought to block several tech mergers, including the purchase of video-game maker, Activision Blizzard by Microsoft. The Doj is trying to break up Google’s ad-technology business—in effect, undoing the DoubleClick merger. However, it is unclear whether allowing this merger was actually a mistake.

To understand why, let’s start with a stylized view of Google’s ad-tech “stack”. The middle layer is Google’s ad exchange, which matches buyers and sellers of advertising space (or “inventory”). On one side of the market are website publishers looking to sell advertising space. They submit sales requests through a digital tool. The predecessor of Google’s sell-side software is DoubleClick for Publishers, which was acquired in the merger. On the other side of the exchange are advertising buyers, who have two routes to market. Agencies and large advertising buyers use demand-side platforms to bid for inventory. Small advertisers go directly to Ad Exchange. Google’s share of traffic varies between 40% and over 90% depending on the stage of the journey. Bids and offers are matched by complex algorithms instantaneously between a click on a website and the display of a display ad.

In a case like this, the best starting question is a straightforward one: Where is the choke point? Microsoft was accused of tying Windows, the dominant operating system for desktop computers, to Internet Explorer in a way that sought to drive Netscape and others out of the market for web browsers. Windows was the choke point, just as the St. Louis bridge was in the case of the railroad. The allegation against Google is more complicated, or at least the story is one that’s harder to tell. The locus of monopoly appears to be shifting, according to the DOJ. First it lies with Google’s power in the demand side of digital advertising through its adjacent strength in search ads. At other times, the company has a stronger hold on the supply side, as when it bought DoubleClick. Still other times, the locus of market power is the exchange. This method of resizing may be how foreclosure works in digital markets. The DOJ’s Trustbusters are certainly eager to present Google’s end-to-end presence in the ad-technology stack as inherently sinister.

But is it? The profitability of the ed-tech stack may reflect the fact that it is more efficient under one roof. The integration of publisher ad servers, exchanges, and demand-side platforms is expected to result in a smoother flow of data, better matching between buyers and sellers, and a more streamlined experience. And there are “network externalities” to consider. Advertising technology brings together different groups (advertisers, publishers and consumers). Each type of customer benefits Custom over the other: advertisers want access to a wider range of inventory; Publishers want lots of bidders for their display space; And so on. In similar networks, it is common for one enterprise to cater to all parties to the exchange. Think of payment systems, which have a business relationship with credit-card users as well as merchants.

Implicit in the DOJ case is the idea that the only route to a large portion of the consumer market is through Google. TrustBusters likes to define markets narrowly. The smaller the market, the larger the dominant firms in it. For their part, businesses like to claim that good alternatives to their products are everywhere: Netflix’s boss once claimed that the firm’s main competitor was “sleeping”. It seems fair to say that “open-web display advertising sold through exchanges” is a distinct industry, as it has its own unique production techniques. What’s less clear is that this is a market that’s truly separate from digital advertising or plain old advertising.

back to the future

Nor is it clear that the FTC was complacent in allowing the DoubleClick purchase. Eventually, the European Commission—no friend of American tech—allowed it after a thorough investigation. Perhaps, though, a better option was available, says William Kovacic, FTC commissioner at the time of the merger and now a law professor at George Washington University. Instead of suing in court to stop the merger and (probably) losing, the agency could have conducted an internal-administrative trial. This, Mr Kovacic says, would have given officers an opportunity to learn about the technology and update their practices. This may have allowed measures, short of terminating the merger, to keep Google under surveillance. The charge of “antitrust under-enforcement,” which has fueled today’s hyperactive merger control, probably didn’t hold up.

It’s hardly water under the bridge. An epic court battle now looks likely. It may seem odd that this corner of the advertising business — almost a hustle for Google — would be the haven for it. But antitrust cases often rest on vague details or arguments. After all, it’s no stranger to a Supreme Court ruling that turned on the use of a railway terminal in St. Louis.

Read more from our column on economics Free Exchange:

What would the perfect climate-change lender look like? (23 February)

The Case for Globalization Optimism (16 February)

Google, Microsoft and the Threat from Extreme Trustbusters (February 9)

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