Although in recent years American officials have been continuously investigating tech giants, so far, only Google has ultimately entered the trial process.
On Monday, September 9th, Eastern Time, Google's "second antitrust case" commenced, with the U.S. Department of Justice (DOJ) accusing Google of damaging advertisers and content creators with its monopolistic position in the digital advertising market. This antitrust trial could potentially impact the future of online advertising.
The trial is set to take place in Alexandria, Virginia, and is expected to last for several weeks. It is the first antitrust trial in the tech industry brought by the Biden administration. California, Colorado, Connecticut, New Jersey, New York, Rhode Island, and Tennessee have joined this case.
The DOJ argues that Google has used its monopolistic position to unfairly raise the prices for customers to advertise and to lower the revenues of website creators. Google, on the other hand, states that there are many options for both buyers and sellers of advertising, and customers often use a mix of different advertising platforms. The DOJ's demands would slow innovation, increase advertising costs, and make it difficult for thousands of small businesses and publishers to grow.
If the DOJ wins the case, it will at least seek to break up Google's advertising management suite (GAM), and Google may also face a large number of compensation lawsuits from advertisers. Morgan Stanley believes that, in the face of Google's monopoly in internet search and advertising, the U.S. Department of Justice is primarily focused on addressing three issues: competitive intensity, the advantage of data scale, and anti-competitive pricing.
In September, the U.S. stock market once again saw a sharp drop similar to that at the beginning of August, with technology stocks, which are heavily represented in the Nasdaq, falling 5.8% last week and entering a technical consolidation phase. On Friday, September 7th, all the "seven sisters" of the U.S. stock market returned to the levels they were at after the sharp drop on August 5th.
Will this Google case once again deal a heavy blow to the already gloomy U.S. technology stocks?
Google's advertising business is akin to "Goldman Sachs or Citigroup owning the New York Stock Exchange."
A month after losing the first antitrust lawsuit, Google once again steps into the courtroom to face federal prosecutors. This time, the DOJ claims that Google's monopolistic practices in the digital advertising field have raised the prices for customers to advertise.
The focus has shifted to Google's advertising tools—a crucial component of Google's $200 billion digital advertising business. These tools allow advertisers to conveniently purchase ad space and enable sellers of advertising, such as website owners, to sell their advertising space.The U.S. Department of Justice has accused Google of violating Sections 1 and 2 of the Sherman Antitrust Act, which prohibit anticompetitive behavior. The Department believes that Google has locked publishers and advertisers into its products.
For many years, Google's advertising business has been widely criticized because Google's advertising tools (ad platforms) participate in multiple aspects of the market's operation: buyers, sellers, and ad exchanges—this gives Google unique market insights and potential manipulation capabilities.
The Department of Justice cited a statement from a Google advertising executive who said that Google's control over multiple stages of the ad sales process is akin to "Goldman Sachs or Citibank owning the New York Stock Exchange."
What will the Department of Justice and Google debate in court?
Specifically, let's look at the arguments of the Department of Justice and Google in this case.
The Department plans to demonstrate that Google has gradually built an unrivaled power through the acquisition of multiple companies and provides services that allow ad buyers to target users across the entire internet. For example, in 2008, Google acquired the market-leading digital advertising company DoubleClick, and this antitrust lawsuit is also referred to as the "DoubleClick Trial."
The Department states that Google's merger and acquisition strategy "laid the foundation for Google's subsequent exclusive behavior in the entire advertising technology industry." The Department claims that Google controls 91% of the ad server market and uses its power to unfairly raise the prices that customers pay for advertising.
The Department points out that some publishers have had to turn to alternative models such as subscriptions to maintain operations, while others have gone out of business. The publishers here refer to entities or individuals who own and operate websites, applications, or other digital platforms, earning income by displaying ads.
The Department plans to call YouTube CEO and former DoubleClick vice president Neal Mohan, who was not acquired, to testify. The Department alleges that DoubleClick's technology allows Google to require publishers to use Google's advertising tools in some cases, meaning that in some online ad purchasing processes, publishers cannot use competitors' services.
The Department states that Google now has a monopoly on the advertising business, with website creators earning less and advertisers paying more. "In a non-monopolistic market, competition would drive prices down, the emergence of innovative advertising technology tools would improve transaction quality, and reduce the costs for market participants."Let's take a look at Google's arguments.
Google has long refuted accusations of monopolizing the online advertising market, pointing out that competitors, including Meta, also hold significant market shares.
Google states that there are many options for both buyers and sellers of advertising, especially in the context of the constantly evolving online advertising market, where clients often mix the use of different advertising platforms.
Every day, billions of ad auctions take place on the internet, and Google's advertising tools have adapted to this situation, always providing competitive rates for clients.
The Department of Justice's lawsuit would slow innovation, increase advertising costs, and make it difficult for thousands of small businesses and publishers to develop.
Regarding mergers and acquisitions, Google argues that previous acquisitions of DoubleClick and AdMeld were not "devastating acquisitions," and regulatory authorities have already approved these acquisitions.
Foreign media reports suggest that both the Department of Justice and Google have prepared many witnesses. Witnesses that the Department of Justice may summon include former Google advertising platform vice president Jerry Dischler, Google AI executive Sissie Hsiao, etc.; witnesses that Google may summon include Google Assistant's engineering director Nitish Korula, Meta vice president Simon Whitcombe, etc.
What would Google face if it loses the lawsuit?
The key to this antitrust case is how Google uses its advertising product suite.
If the Department of Justice wins the lawsuit, it will at least seek to break up Google's advertising management suite (GAM), a platform that allows brands to create and manage ad units, track advertising campaigns, and enables publishers to sell advertising inventory.This is different from Google's flagship platform—Google Ads, which is primarily used for businesses to place advertisements on search engines, websites, YouTube, and other partner sites.
In the most recent quarter, Google's parent company, Alphabet, generated $64.6 billion in advertising revenue, accounting for more than two-thirds of its total revenue. The Google Advertising Manager (GAM) suite, part of Google's web business, brought in $7.4 billion in the second quarter, representing about 11% of the total advertising revenue.
Furthermore, if the Department of Justice (DOJ) prevails, Google could face a multitude of lawsuits from advertisers seeking monetary compensation. Analysts at Bernstein suggest that Google could be facing lawsuits amounting to as much as $100 billion.
Morgan Stanley believes that in addressing Google's monopoly in internet search and advertising, the DOJ is primarily concerned with resolving three issues: competitive intensity, data scale advantages, and anti-competitive pricing. Based on this, Morgan Stanley has speculated on four potential outcomes if Google loses the lawsuit.
Outcome 1 (lowest likelihood): Allowing users to choose their screens and cancel exclusive agreements.
Consumers would choose search engines based on product experience and brand. Data from Europe indicates that despite the implementation of screen choice for users at the end of 2020, Google still maintains a market share of over 97% on mobile devices.
Therefore, this measure would have minimal impact on Google's business. Morgan Stanley estimates that the impact on EBIT (Earnings Before Interest and Taxes) by 2028 would be between -2% and +15%. The slight decrease in revenue that Google might experience due to this measure could be offset by lower traffic acquisition costs (TAC).
However, the judge hopes to see a change in the monopolistic situation of the internet search field dominated by Google. Therefore, Morgan Stanley believes that the likelihood of the DOJ taking this measure is the lowest.
Outcomes 2 & 3 (higher likelihood): Further rectify Google's data advantages and anti-competitive pricing, and encourage competitors to invest in the internet search field.
Morgan Stanley believes that a series of measures, including eliminating exclusive clauses in the Revenue Sharing Agreement (RSA), allowing users to choose their screens, permitting access to Google's "click/query/user" data, and controlling advertising bidding pricing, would be more conducive to establishing a fair search competition environment and encouraging competitors to continue investing.Under these initiatives, competitors in the search field such as Bing, GPT, and others will continue to invest, promoting the differentiation of search engines, attracting users, and significantly impacting Google's earnings before interest and taxes.
These initiatives may also put pressure on Google's profitability in the short term, thereby accelerating Google's investment and innovation pace in search products.
Increased investment by multiple companies in the search field may also lead to a higher quality user experience, which is positive for society.
Scenario 4 (the worst-case for Google): Restricting Google's payment capabilities in distribution agreements.
Morgan Stanley indicates that, in the most severe case, in addition to the above measures, the Department of Justice may also propose to restrict Google's ability to pay third parties, while allowing other competitors to bid freely.
This measure would have the most negative impact on Google because it would make Microsoft and others more competitive in bidding for Apple's display positions, and even potentially exclusive rights. Morgan Stanley notes that Microsoft has attempted to win Apple's search contract, but Apple has repeatedly chosen to cooperate with Google due to its superior conversion rates, economic benefits, and user experience.