DefiningDefining thethe RelevantRelevant ProductProduct MarketMarket forfor GoogleGoogle-- DoubleClickDoubleClick MergerMerger

Robert W. Hahn, Reg-Markets Hal J. Singer, Criterion Economics IndustryIndustry BackgroundBackground

„ InIn 2007,2007, U.S.U.S. advertisersadvertisers werewere expectedexpected forfor thethe firstfirst timetime toto spendspend moremore onon onlineonline advertisingadvertising thanthan onon radioradio advertisingadvertising • Source: eMarketer

„ U.S.U.S. onlineonline advertisingadvertising revenuesrevenues inin 20072007 werewere roughlyroughly $17$17 billion,billion, anan increaseincrease ofof 3535 percentpercent overover 20052005 revenuesrevenues • Source: Interactive Advertising Bureau

2 TheThe InputsInputs toto anan OnlineOnline AdAd

„ Suppliers of online advertising provide three primary inputs: (1) ad tools, (2) intermediation, and (3) publisher tools „ Ad tools: software packages that allow advertisers to manage inventory and produce ads „ Intermediation: matching advertisers (buyers) to publishers (sellers) in an advertising marketplace • publishers’ direct sales forces • “ad networks” (resell publisher ad space) • “ad exchanges” (match advertisers and publishers)

3 ResearchResearch AgendaAgenda

„ OurOur analysisanalysis focusesfocuses onon whetherwhether differentdifferent channelschannels ofof onlineonline advertisingadvertising representrepresent aa singlesingle productproduct marketmarket „ Limitation:Limitation: WeWe dodo notnot analyzeanalyze whetherwhether otherother formsforms ofof advertisingadvertising (e.g.,(e.g., print)print) shouldshould alsoalso bebe includedincluded • Reid, King, Martin and Soh (2005) (finding that local advertisers perceive Internet advertising to be a poor substitute for traditional media)

4 SegmentsSegments ofof thethe OnlineOnline AdvertisingAdvertising IndustryIndustry andand thethe MajorMajor ProvidersProviders

Online Advertising Search-Based Publisher-Based Contextual Graphic •Google.com •Yahoo.com •Google AdSense •DoubleClick •MSN.com •Yahoo Publisher •ValueClick Network •AOL.com •aQuantive •Quigo •Ask.com •24/7 Real Media

5 ContextualContextual andand GraphicGraphic AdAd InputInput ProvidersProviders

Contextual Graphic

• DoubleClick Advertiser Tools • aQuantive • ValueClick • Google Adsense • Direct Sales • ValueClick Intermediation • Yahoo • aQuantive Publisher • 24/7 Real Network Media

• DoubleClick Publisher Tools • 24/7 Real Media

6 TheThe SearchSearch SegmentSegment

„ GoogleGoogle collectscollects betweenbetween 7070 andand 7676 percentpercent ofof searchsearch adad revenuerevenue •• Source:Source: AlanAlan RimmRimm--Kaufman,Kaufman, eMarketereMarketer „ TheThe toptop tenten paidpaid searchsearch advertisers,advertisers, generatinggenerating 1616 percentpercent ofof allall sponsoredsponsored links,links, werewere allall retailretail oror comparisoncomparison shoppingshopping sitessites •• Source:Source: comScorecomScore

7 TheThe PublisherPublisher--BasedBased SegmentSegment

„ LineLine betweenbetween texttext--basedbased andand graphicgraphic adsads isis blurringblurring • Google’s AdSense, which scans a page’s content and selects an appropriate ad, can now deliver “text or image ads.” „ 6060 percentpercent ofof thethe $2$2 billionbillion aa yearyear contextualcontextual segmentsegment waswas claimedclaimed byby GoogleGoogle’’ss AdSenseAdSense • Source: eMarketer „ GraphicGraphic adsads useuse electronicelectronic tagstags oror ““cookiescookies”” toto tracktrack whichwhich sitessites anan InternetInternet useruser visitsvisits (behavioral(behavioral ratherrather thanthan contextual)contextual) 8 LegalLegal PrecedentPrecedent onon MarketMarket DefinitionDefinition

„ KinderStart.comKinderStart.com LLCLLC v.v. Google,Google, IncInc „ PlaintiffPlaintiff allegedalleged searchsearch resultresult rankingranking abusesabuses • Argued that search advertising was a relevant product market „ CourtCourt rejectedrejected thisthis definitiondefinition asas beingbeing tootoo narrownarrow • “Because a website may choose to advertise via search-based advertising or by posting advertisements independently of any search, search-based advertising is reasonably interchangeable with other forms of Internet advertising.” 9 SurveySurvey DataData

„ AccordingAccording toto MergerMerger Guidelines,Guidelines, productproduct marketsmarkets areare defineddefined basedbased onon ““evidenceevidence thatthat buyersbuyers [1][1] havehave shiftedshifted oror [2][2] havehave consideredconsidered shiftingshifting purchasespurchases betweenbetween productsproducts inin responseresponse toto relativerelative changeschanges inin priceprice oror otherother competitivecompetitive variables.variables.”” „ InIn thethe absenceabsence ofof evidenceevidence onon [1],[1], aa surveysurvey cancan informinform [2][2]

10 SurveySurvey BackgroundBackground

„ Firm:Firm: ShawShaw andand CompanyCompany „ Respondents:Respondents: 200200 retailretail advertisementadvertisement managersmanagers whowho hadhad purchasedpurchased publisherpublisher--basedbased advertisingadvertising withinwithin thethe lastlast yearyear „ RespondentsRespondents answeredanswered asas manymany asas 2121 questionsquestions relatedrelated toto theirtheir usageusage ofof onlineonline advertising,advertising, theirtheir substitutionsubstitution preferences,preferences, andand theirtheir firmfirm characteristicscharacteristics 11 RepresentativeRepresentative RespondentRespondent

„ SpentSpent $2.4$2.4 millionmillion onon onlineonline advertisingadvertising inin thethe lastlast twelvetwelve monthsmonths

„ BeenBeen inin businessbusiness forfor roughlyroughly 6.56.5 yearsyears

„ HadHad aboutabout 550550 employeesemployees

„ ““FinancialFinancial servicesservices oror insuranceinsurance”” waswas thethe mostmost commoncommon industry,industry, followedfollowed byby ““ClothingClothing apparelapparel oror shoes,shoes,”” andand ““ComputerComputer services,services, hardware,hardware, softwaresoftware””

12 DoDo AdvertisersAdvertisers ViewView GraphicGraphic AdsAds asas SubstitutesSubstitutes forfor ContextualContextual Ads?Ads?

„ Q6.Q6. SupposeSuppose thethe priceprice ofof graphicgraphic adsads placedplaced onon allall publisherspublishers’’ websiteswebsites increasedincreased byby 1010 percent.percent. HowHow wouldwould youryour purchasespurchases ofof texttext--basedbased adsads placedplaced onon publisherspublishers’’ websiteswebsites change?change? „ Not at all. „ Increase by 5 percent or less. „ Increase between 5 and 10 percent. „ Increase by 10 percent or more. „ Decrease by 5 percent or less. „ Decrease between 5 and 10 percent. „ Decrease by 10 percent or more. „ Don’t Know / Refused / NA. 13 DoDo AdvertisersAdvertisers ViewView GraphicGraphic AdsAds asas SubstitutesSubstitutes forfor ContextualContextual Ads?Ads? Amount Percent Not At 12% All Increase < 5% 12% 5-10% 31% > 10% 25% Subtotal 68% Decrease < 5% 5% 5-10% 6% > 10% 2% Subtotal 13% Don’t Know/Refused/NA 9%

14 HowHow WouldWould CurrentCurrent DoubleClickDoubleClick CustomersCustomers ReactReact toto aa PricePrice Increase?Increase?

„ Q10. [ASK ONLY THOSE WHO USED DOUBLECLICK SERVICE IN LAST YEAR] Now suppose that the price of DoubleClick’s graphic ads services – including ad management or exchange software – increases by 10 percent. Would you: „ Purchase the same amount of graphic ads through DoubleClick. „ Purchase the same amount of graphic ads through another firm (such as ValueClick, aQuantive, or 24/7 Real Media). „ Purchase fewer graphic ads through DoubleClick and increase the amount of text-based ads you purchase on the publisher’s website. „ Purchase fewer graphic ads through DoubleClick and increase the amount of search-based ads you purchase. „ Keep everything the same. „ Don’t Know / Refused / NA. 15 HowHow WouldWould CurrentCurrent DoubleClickDoubleClick CustomersCustomers ReactReact toto aa PricePrice Increase?Increase?

Percent Purchase Same Amount of Graphics 30% Ads Through DoubleClick Purchase Same Amount of Graphics 41% Ads Through Rival Firm Purchase Fewer DoubleClick Graphic 19% Ads and More Contextual Ads Purchase Fewer DoubleClick Graphic 9% Ads and More Search-Based Ads Don't Know/Refused/NA 1%

16 ConclusionsConclusions

„ Advertiser tools/intermediation services used in one channel likely belong in the same product market as advertiser tools/intermediation used in another channel „ Google could drive some marginal DoubleClick customers to contextual ads (dominated by Google) „ Evans & Noel (2007): Given network effects in online advertising, and given the higher absolute margins of Google’s Adsense relative to DoubleClick’s service, amount of switching between channels need not be significant

17 DharDhar’’ss CritiqueCritique ofof OurOur SurveySurvey

„ ClaimClaim 1:1: AA smallsmall increaseincrease inin DoubleClickDoubleClick’’ss adad serviceservice feesfees couldcould notnot induceinduce thethe levellevel ofof substitutionsubstitution byby onlineonline advertisersadvertisers evidencedevidenced byby thethe survey.survey.

„ ClaimClaim 2:2: FindsFinds faultsfaults withwith thethe surveysurvey design,design, includingincluding thethe lacklack ofof openopen--endedended questionsquestions andand samplesample size.size.

18 DharDhar’’ss CritiqueCritique ofof OurOur SurveySurvey

„ DemandDemand responseresponse amongamong onlineonline advertisersadvertisers thatthat currentlycurrently useuse DoubleClickDoubleClick servicesservices (19%)(19%) isis proofproof thatthat thethe surveysurvey resultsresults areare ““obviouslyobviously implausible.implausible.”” • Cites blog claiming that the cost of display ad serving is 2 percent of the total cost of display ads • Thus, any increase in the price of DoubleClick’s input would hardly be felt by advertiser • This line of argument was embraced by the FTC in its statement approving the deal 19 DharDhar’’ss CritiqueCritique ofof OurOur SurveySurvey

„ Ad serving costs ($0.125 CPM) could be small in proportion to total ad costs for banner ad on a very popular website • CPM of a display ad on NYTimes.com can range between $28 and $50. • Implies ad serving costs < 1% of total cost of the display ad „ However, Dhar’s two-percent estimate does not appear to be true for the vast majority of display ads • JPMorgan: 83 percent of all U.S. display ads sold for less than a $1 CPM in 2007 • Implies ad serving costs > 12.5 percent for the vast majority of display ads

20 DharDhar’’ss CritiqueCritique ofof OurOur SurveySurvey

„ Argues that survey respondents must have confused an increase in the price of DoubleClick’s input with an increase in the final price of the display ad. „ Seems unlikely in light of the fact that 68 percent of survey respondents said that they would consider shifting some portion of their purchases of display ads to contextual ads in response to a ten percent increase in the final price of the display ad. „ Thus, the 19 percent response rate associated with an increase in the price of the DoubleClick-provided input is not inconsistent with other answers in the survey.

21 DharDhar’’ss CritiqueCritique ofof OurOur SurveySurvey

„ PrePre--screeningscreening questionsquestions alsoalso preventprevent confusionconfusion • 1) work for a company that purchases Internet advertising; • (2) purchase or have knowledge about these advertising purchases; and • (3) that the respondent’s company purchased Internet advertising that ran on a publisher’s website (such as NYTIMES.COM or ESPN.COM)

22 FTCFTC’’ss StatementStatement

„ ““DirectlyDirectly purchasedpurchased displaydisplay adsads”” areare distinctdistinct fromfrom contextualcontextual adsads • Contextual ads are used for “direct response advertising,” while directly purchased display ads are used for “brand advertising.”

„ But conclude that the prices of contextual ads are constrained by display ads sold by ad intermediaries

All ads sold by intermediaries Directly purchased ads (contextual, display) (display)

Google DoubleClick 23 “Brand advertising”

Do advertisers perceive these two ads to be substitutes? Survey says . . . Yes.

“Direct response ad”

24