When two companies allegedly collude against an industry

This looks baaaaaaaaaaad

In 2018, during a Senate hearing on Facebook, Senator Lindsey Graham asked Facebook’s CEO Mark Zuckerberg about who Zuckerberg considers to be a Facebook competitor. 

“There are three categories I would focus on. One, are the other tech platforms. So Google, Apple, Amazon, Microsoft; we overlap with them in many ways,” Zuckerberg responded before Graham cut him off to use the analogy of a car company. 

Today, the Wall Street Journal reports that it saw an unredacted draft version of the initial lawsuit filed by 10 states’ Attorneys General last week, the one that charged that “Google and its co-conspirator Facebook unreasonably restrained trade and harmed competition through an unlawful agreement to allocate auction wins and to fix prices in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.” (Page 106 of the lawsuit.) 

The WSJ:

Ten Republican attorneys general, led by Texas, are alleging that the two companies cut a deal in September 2018 in which Facebook agreed not to compete with Google’s online advertising tools in return for special treatment when it used them.

Google used language from “Star Wars” as a code name for the deal, according to the lawsuit, which redacted the actual name. The draft version of the suit says it was known as “Jedi Blue.”

The price of the alleged deal, the deal that would help both companies while squashing others? According to the WSJ:

The final version of the lawsuit didn’t make public details about the deal’s value. The draft states that starting in the deal’s fourth year, Facebook is locked into spending a minimum of $500 million annually in Google-run ad auctions. 

“Facebook is to win a fixed percent of those auctions,” the draft version says. The lawsuit says “Facebook is to [REDACTED].”

The implications of Google and Facebook teaming up together to not only fix the price fix when it comes to ads, but also “cooperate and assist” one another if they ever faced investigation are huge. 

The industry has been calling the two companies a ‘duopoly’ for years and, well, when there’s smoke there’s fire. 

Both Facebook and Google P.R. teams told the WSJ this is much ado about nothing. 

A Google spokesperson said such agreements over antitrust threats are extremely common.

The states’ “claims are inaccurate. We don’t manipulate the auction,” the spokesperson said, adding that the deal wasn’t secret and that Facebook participates in other ad auctions. “There’s nothing exclusive about [Facebook’s] involvement and they don’t receive data that is not similarly made available to other buyers.”

The redacted lawsuit filed last week makes no mention of Facebook Chief Operating Officer Sheryl Sandberg. According to the draft version, Ms. Sandberg signed the deal with Google. The draft version also cites an email where she told CEO Mark Zuckerberg and other executives: “This is a big deal strategically.”

Like Google, Facebook has also disputed the allegations in the lawsuit, saying its agreements for bidding on advertising promote choice and create clear benefits for advertisers, publishers and small businesses.

“Any allegation that this harms competition or any suggestion of misconduct on the part of Facebook is baseless,” a Facebook spokesperson said.

But it’s hard to square this with the reality publishers face, as they have lost incredible amounts of revenue over the years. Indeed, the Texas lawsuit quotes an AdMonsters 2017 piece (bold is what the lawsuit quotes):

Then Google went and upended the whole game by introducing Dynamic Allocation within its ad server, Doubleclick for Publishers, which also happens to be the most widely used sell-side display ad server. Through a server-to-server connection, Google’s buy-side exchange AdX was suddenly able to enter a real-time bid into DFP for every impression, bypassing the waterfall completely.

So even if an SSP had a buyer willing to more than the tag inside the ad server, the AdX bid would still win if it was higher than the SSP tag (and if decisioning was based on price). That’s right—the SSP tag, not the actual bid that would come through that SSP’s auction, which could be higher. (The auction would never occur!) Worse, because programmatic works through second price auctions, the AdX bidder would only pay a cent above the indirect tag SSP tag. The lack of competition was costing pubs cold hard cash.

So here we are, at the end of a year marked by a pandemic and multiple antitrust lawsuits and yet Alphabet, Google’s parent company, reported revenue of $46.17 billion for Q3, a 14 percent jump from Q3 2019, with net income of $11.2 billion. Its stock started the year at $1368 and as of this writing, sits at $1715. 

Facebook’s revenue hit $21.47 billion in Q3, up 22 percent from the year before, and had net income of $7.85 billion, up 29 percent, all during a giant advertiser boycott that saw more than 1,000 companies say they were pulling or pausing their ad spend for July. The company also reported 2.74 billion monthly active users, an increase of 12 percent from the year prior. 

Meanwhile, publishers continue to take it on the chin, losing ad revenue as the pandemic forced advertisers to pull spend. And while every media exec has privately complained about Google and Facebook over the years, they’re now starting to talk publicly. Or at least through their lobbying organizations.

The WSJ reports today that publishers feel ‘validated’ in their complaints.

“One of the messages news publishers always get is, ‘Stop complaining. Google just has better ad products,’” said David Chavern, the president of the News Media Alliance, a news-publisher trade group. The suit showed “they also controlled everything about the market, and that has had really bad and profound effects on publishers,” he said.

Several publishers cooperated with the states to build a case, people familiar with the situation said, and much of the suit lines up with the complaints publishers have made about Google for several years.

The trick now for publishers and advertisers will be to figure out what next. Companies still need to use Google and Facebook to deliver ads. And it will still take years before this lawsuit gets to court, let alone settled and/or decided. But knowing now that the two companies worked together to allegedly price fix ad rates while also agreeing to supposedly not work against each other, how does an advertiser or publisher enter into a good-faith relationship with either company right now?

Thank you for allowing me in your inbox, today and every day. If you have tips or thoughts on the newsletter, drop me a line. Or you can follow me on Twitter. If you arrived here through social or a colleague, please consider signing up. Thanks for reading and I’ll see you tomorrow!

Grateful Dead, “I Need a Miracle”

Some interesting links:

For phishing scams:

  • Why on Earth Is Someone Stealing Unpublished Book Manuscripts? (NYT)

For brands behaving badly:

  • U.S. sues Walmart, alleging role in fueling opioid crisis (WSJ)

For publisher business:

  • Gannett negotiates early exit from management deal with Fortress Investment Group (Gannett)

  • Group Nine incorporate a SPAC to potentially buy more companies (SEC filing)

  • The Stench of Roger Ailes Still Clings to Fox News CEO Suzanne Scott (Daily Beast)

For Amazon’s domination:

  • How Amazon Wins: By Steamrolling Rivals and Partners (WSJ)

For platforms:

  • Twitter @POTUS account will reset followers to zero for Joe Biden (Bloomberg)