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Why Google Dominates Advertising Markets Competition Policy Should Lean on the Principles of Financial Market Regulation

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Why Google Dominates Advertising Markets Competition Policy Should Lean on the Principles of Financial Market Regulation Why Google Dominates Advertising Markets Competition Policy Should Lean on the Principles of Financial Market Regulation Dina Srinivasan* * Since leaving the industry, and authoring The Antitrust Case Against Face- book, I continue to research and write about the high-tech industry and competition, now as a fellow with Yale University’s antitrust initiative, the Thurman Arnold Pro- ject. Separately, I have advised and consulted on antitrust matters, including for news publishers whose interests are in conflict with Google’s. This Article is not squarely about antitrust, though it is about Google’s conduct in advertising markets, and the idea for writing a piece like this first germinated in 2014. At that time, Wall Street was up in arms about a book called FLASH BOYS by Wall Street chronicler Michael Lewis about speed, data, and alleged manipulation in financial markets. The controversy put high speed trading in the news, giving many of us in advertising pause to appre- ciate the parallels between our market and trading in financial markets. Since then, I have noted how problems related to speed and data can distort competition in other electronic trading markets, how lawmakers have monitored these markets for con- duct they frown upon in equities trading, but how advertising has largely remained off the same radar. This Article elaborates on these observations and curiosities. I am indebted to and thank the many journalists that painstakingly reported on industry conduct, the researchers and scholars whose work I cite, Fiona Scott Morton and Aus- tin Frerick at the Thurman Arnold Project for academic support, as well as Tom Fer- guson and the Institute for New Economic Thinking for helping to fund the research this project entailed. I remain deeply grateful to the many scholars that generously shared their feedback, comments, and insight, often on matters well outside of my area of expertise: Eric Budish, Kevin Haeberle, Scott Hemphill, Michael Kearns, Lina Khan, Jonathan Macey, Doug Melamed, John Morley, Gabriel Rauterberg, Thomas Philippon, Marc Rotenberg, Ashkan Soltani, and Chester Spatt, amongst others. I also warmly thank John Schwall and Rick Arney for helping me to better appreciate the parallels to financial markets, Zach Edwards for critical thinking and research assis- tance, Jennifer LaCosse for careful edits and thoughtful suggestions, Chaaru Deb for excellent legal research assistance, and the editors at the STANFORD TECHNOLOGY LAW REVIEW for outstanding editorial support. The views and errors therein are my own. 56 STANFORD TECHNOLOGY LAW REVIEW Vol. 24:1 24 STAN. TECH. L. REV. 55 (2020) ABSTRACT Approximately 86% of online display advertising space in the U.S. is bought and sold in real-time on electronic trading venues, which the industry calls “ad- vertising exchanges.” With intermediaries that route buy and sell orders, the structure of the ad market is similar to the structure of electronically traded fi- nancial markets. In advertising, a single company, Alphabet (“Google”), simul- taneously operates the leading trading venue, as well as the leading intermedi- aries that buyers and sellers go through to trade. At the same time, Google itself is one of the largest sellers of ad space globally. This Article explains how Google dominates advertising markets by engaging in conduct that lawmakers prohibit in other electronic trading markets: Google’s exchange shares superior trading information and speed with the Google-owned intermediaries, Google steers buy and sell orders to its exchange and websites (Search & YouTube), and Google abuses its access to inside information. In the market for electronically traded equities, we require exchanges to provide traders with fair access to data and speed, we identify and manage intermediary conflicts of interest, and we require trading disclosures to help police the market. Because ads now trade on electronic trading venues too, should we borrow these three competition principles to pro- tect the integrity of advertising? Fall 2020 WHY GOOGLE DOMINATES ADVERTISING MARKETS 57 TABLE OF CONTENTS I. INTRODUCTION ........................................................................................... 58 II. ELECTRONIC TRADING MARKETS .............................................................. 69 A. Advertising Market Reflects the Structure of an Electronic Trading Market ..................................................................................................... 69 B. Common Competition Problems in Electronic Trading Markets ........... 77 C. The Competition Principles We Apply in the Equities Trading Market 80 III. GOOGLE DOMINATES ONLINE ADVERTISING MARKETS BY ENGAGING IN CONDUCT LAWMAKERS PROHIBIT IN OTHER ELECTRONIC TRADING MARKETS ..................................................................................................... 86 A. Google Has Information and Speed Advantages .................................... 88 1. Google Acquires Leading Ad Server DoubleClick ........................... 88 2. DoubleClick Ad Server Starts to Play Favorites When Sharing User Identity ............................................................................................. 94 3. Google-Owned Intermediaries Have an Information Advantage on Google’s Exchange ........................................................................... 98 4. Consumer Privacy Offered as Reason for Information Asymmetry ....................................................................................................... 102 5. Google-Owned Intermediaries Have a Speed Advantage on Google’s Exchange ........................................................................................ 107 B. Discriminatory Routing of Orders and More Speed Races .................. 117 1. Routing Orders to Google’s Exchange and Owned Properties ..... 117 2. Market Creates Invention to Circumvent Routing Restrictions and Set Own Speeds ............................................................................. 127 3. Google AMP Speed Protocol Restricts Trading Through Non- Google Venues ................................................................................ 132 4. Google Search “Speed Update” Further Restricts Trading Through Non-Google Venues ....................................................................... 144 C. Inside Information Abuses .................................................................... 149 1. Google’s Ad Server Shares Information About Competitors’ Trading Activity with Google’s Exchange and Buying Tools, Permitting Them to Trade Ahead of Orders .................................................... 149 2. Google Amends Terms and Conditions to Breach “Ethical Walls” ....................................................................................................... 154 IV. POLICY CONSIDERATIONS ........................................................................ 158 A. Advertising Exchanges Should Provide Fair Access to Information and Speed ..................................................................................................... 158 B. Steps Toward Identifying and Managing Intermediary Conflicts of Interest .................................................................................................. 162 1. Structural Separations ................................................................... 162 2. Conduct and Disclosure Rules ...................................................... 163 3. Transparency and Disclosure ........................................................ 171 V. CONCLUSION ............................................................................................. 172 VI. APPENDIX .................................................................................................. 174 A. Timeline ................................................................................................ 174 B. Screenshot of Auction Timestamp Transparency ................................. 175 58 STANFORD TECHNOLOGY LAW REVIEW Vol. 24:1 I. INTRODUCTION The business of advertising has changed drastically over the last two decades. In the past, advertising contracts were negotiated in person— think Mad Men-type advertising and publishing eXecutives over two- martini lunches off Madison Avenue. Today, the largest category of ad- vertising, online advertising, is rarely negotiated by people at all. Ad- vances in technology allow ad space to be bought and sold electronically through centralized trading venues at high speeds, without people ever meeting face-to-face. When a user visits a website, the ad space on a page is instantly routed into one or more of these venues. There, the space is auctioned in real-time to the highest bidder. At the conclusion of these auctions, the advertisers’ ads return and display to the user in time for the page to load and before the user has noticed anything has occurred. The user just sees ads targeted to them, say one for Barclays bank. The rise of electronic ad trading, widely known today as “program- matic advertising,” paralleled the rise of electronic trading across various sectors of the economy. In 2005, the New York Stock Exchange merged with an electronic trading company, sunsetting the buying and selling of stock on its iconic trading floor on Wall Street.1 Around this time, early advertising technology company Right Media launched the RMX “adver- tising eXchange,” the first-ever electronic trading venue for ads.2 Just like that, by “borrowing tactics from Wall Street,” advertising went
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