Google – Doubleclick A complainant’s perspective
ACE 2008
Hans W. Friederiszick Budapest, November 27th 2008 Preliminary remark
• We were engaged by Crowell & Moring on behalf of a large US advertiser opposing the merger • Only involved in the first phase of the merger; limited data availability • Worked together with Prof. Günther (HU)
27 Nov 08 ACE conference 2008 Budapest 1 Contents
Characteristics of online advertising and Google’s outstanding market position in search
Potential theory of harm
I Horizontal effects
II Elimination of potential competition
III Non horizontal effects
II Elimination of potential competitionConclusion
27 Nov 08 ACE conference 2008 Budapest 2 Online advertising small but increasing segment
Worldwide advertising expenditure 400000 20000
350000 17500
300000 15000
250000 12500 pricesInternet 200000 10000
150000 7500
100000 5000
€m, constant 2000 prices Total 50000 2500 €m, constant 2000
0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total Worldwide Advertising Expenditure Total World Internet Advertising Expenditure
Source: World Advertising Trends 2007, World Advertising Research Center (www.warc.com).
27 Nov 08 ACE conference 2008 Budapest 3 Increasing share of online advertising expended in Europe
Distribution of Worldwide Internet Advertising Expenditure 100% l
90%
80%
70%
60%
50%
40%
30%
20%
10%
% Share Internetof Advertising Expenditure 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
North America Europe Asia/Pacific Latin America Africa Middle East
Source: World Advertising Trends 2007, World Advertising Research Center (www.warc.com).
27 Nov 08 ACE conference 2008 Budapest 4 Compared to the US online ad expenditure still underrepresented (exception: UK; Scandinavian countries)
Internet Advertising Expenditure per Region 2006 2006 Per Capita Per Capita Percentage Country/Region (million $) (Million €) ($) (€) of GDP USA 16879.0 13443.0 56.1 44.7 0.13% EU 7013.1 5585.5 14.2 11.3 0.05% UK 3714.3 2958.2 62.1 49.5 0.16% Germany 690.0 549.5 8.3 6.6 0.02% France 464.2 369.7 7.6 6.1 0.02% Sweden 358.1 285.2 39.5 31.5 0.09% Netherlands 313.6 249.8 19.2 15.3 0.05% Denmark 301.7 240.3 55.4 44.1 0.11% Italy 247.9 197.4 4.3 3.4 0.01% Norway 207.8 165.5 44.8 35.7 0.06% Spain 201.1 160.2 4.6 3.7 0.02% Belgium 91.9 73.2 8.8 7.0 0.02% Poland 69.3 55.2 1.8 1.4 0.02% Finland 65.7 52.3 12.5 10.0 0.03% Austria 46.1 36.7 5.6 4.5 0.01% Hungary 43.4 34.6 4.3 3.4 0.04% Czech Republic 23.8 19.0 2.3 1.8 0.02% Greece 21.3 17.0 1.9 1.5 0.01% Ireland 16.9 13.5 4.0 3.2 0.01% Latvia 5.9 4.7 2.6 2.1 0.03% Slovenia 5.8 4.6 2.9 2.3 0.02% Estonia 5.3 4.2 4.0 3.2 0.03% Lithuania 4.4 3.5 1.3 1.0 0.01% Source: World Advertising Trends 2007, World Advertising Research Center (www.warc.com). 27 Nov 08 ACE conference 2008 Budapest 5 Characteristics of on-line advertisement
i. Format – text/graphical ii. Triggering – search/display iii. Targeting – search, contextual, behavioral
27 Nov 08 ACE conference 2008 Budapest 6 The traditional ad-server model
Pays up to 10% of media buy Advertiser Feedback: AdImpressions AdClicks Pricing based on cost-per- click (CPC) and/or cost- per-impression Ad-server (CPM)
Access to publisher‘s web site Publisher
Site- and Feedback: user-specific AdImpressions Provides content Allocates limited time budget ads AdClicks Viewer
27 Nov 08 ACE conference 2008 Budapest 7 The Google model
Advertiser
pays per click; sells space on search per keyword result pages based on search terms
Ad-server Search Engine Provider Publisher
Viewer
27 Nov 08 ACE conference 2008 Budapest 8 I. Horizontal overlap
Google and DoubleClick compete in online advertising − DoubleClick operates in the direct channel − Google operates in the indirect channel The parties compete in selling ad serving products i. DoubleClick sells ad serving products unbundled ii. Google sells ad serving products bundled with intermediation Advertisers and publishers consider the direct and indirect channels to be substitutes. i. Advertisers allocate ad budgets across channels based on price and performance. ii. Many publishers have direct sales and participate in Google network.
27 Nov 08 ACE conference 2008 Budapest 9 I. Horizontal overlap
The merged firm will have an incentive to raise prices (non-coordinated effects) i. An increase in Google search or content network prices will divert business to direct channel where DoubleClick operates ii. An increase in DoubleClick prices will divert business from the direct channel to Google, especially to its content network but also perhaps its search engine. Google’s ad network may be a relatively close substitute for the direct channel based on better targeting iii. An increase in DoubleClick prices will divert business from other ad networks in the indirect channel to Google’s network Evidence ⇒ Market shares ⇒ Simulations using a range of substitution parameters indicate an incentive to raise prices post merger. Prices effects may be significant given high margins, and given high shares for Google and DoubleClick where they operate.
27 Nov 08 ACE conference 2008 Budapest 10 Google outstanding throughout Europe in search (stronger position in NL; weaker position in UK)
Search engine page view and active reach
Country Name Page Views Active Reach
Dec Dec Change Jan Dec Dec Change Jan 2006 2007 2008 2006 2007 2008
EU Total 100.0% 100.0% 0.0% 100.0% 79.2% 83.5% 5.3% 95.1%
1 Google Search 90.6% 92.4% 2.0% 92.2% 73.9% 79.1% 6.9% 87.4%
2 Yahoo! Search 5.0% 3.6% -28.6% 3.3% 13.9% 12.1% -13.3% 13.8%
3 MSN/Windows 2.3% 2.4% 3.0% 2.6% 15.2% 16.6% 9.2% 19.3% Live Search
4 AOL Search 2.0% 1.6% -19.5% 1.8% 4.9% 4.4% -11.0% 5.2%
5 Microsoft 0.1% 0.1% -35.9% 0.1% 1.9% 1.4% -26.8% 1.3% Search
Source: Nielsen Netratings Netview report
27 Nov 08 ACE conference 2008 Budapest 11 This is true even if one incorporates non-search sites
Portal level page view and active reach
Country Name Page Views Active Reach
Dec Dec Change Jan Dec Dec Change Jan 2006 2007 2008 2006 2007 2008
EU Total 100.0% 100.0% 0.0% 100.0% 87.9% 90.1% 2.5% 102.7%
1 Google 65.5% 70.1% 7.0% 54.6% 76.5% 81.9% 7.1% 91.1%
2 MSN/Windows na na na 22.3% na na na 64.1% Live
3 Yahoo! 24.0% 21.8% -9.0% 17.1% 41.9% 40.7% -2.8% 45.2%
4 AOL Media 7.3% 6.0% -18.7% 4.5% 23.0% 26.3% 14.3% 30.0% Network
5 Microsoft 3.2% 2.1% -34.0% 1.6% 60.7% 56.8% -6.4% 61.4%
Source: Nielsen Netratings Netview report
27 Nov 08 ACE conference 2008 Budapest 12 As an alternative, advertisers could reach maximal up to 23% - 44% of Google users by placing an ad on both Yahoo and MSN/Windows
Overlap analysis between the different search engines (example of Germany)
Country Name AOL Search Google Search Microsoft MSN/Windows Yahoo Search Search Live Search
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007
Germany AOL Search 100% 100% 62% 66% 4% 3% 11% 14% 22% 11%
Google Search 5% 5% 100% 100% 3% 2% 13% 13% 13% 10%
Microsoft Search 10% 9% 95% 96% 100% 100% 28% 35% 16% 23%
MSN/Windows Live Search 5% 7% 84% 84% 6% 6% 100% 100% 23% 14%
Yahoo Search 11% 8% 85% 88% 3% 5% 23% 19% 100% 100%
Source: Nielsen Netratings Netview report
27 Nov 08 ACE conference 2008 Budapest 13 Publicly available price comparisons suggest significantly higher prices charged by Google
Comparison of rates for search adds Search Add provider CPA Average CPC Ask Sponsored Listings $19.79 $0.38 MSN $36.28 $1.52 Yahoo! Search Marketing $36.52 $1.53 Google AdWords $46.78 $1.96 Source: IAC Advertising Solutions, Ask Sponsored Listings
-> overall: outstanding market position of Google for search ads undisputed
27 Nov 08 ACE conference 2008 Budapest 14 Market share (measured by ad expenditure) of Google and Google network in the global advertisement market. l 100% 90% 80% 70% 60% 50% 40% >38% MS 30% 20% 10% 0% 2002 2003 2004 2005 2006 % Share Internet of Advertising Expenditure Year
Total World Internet Advertising Expenditure Advertising revenues Google Network Web Sites Advertising revenues Google Web Sites
Source: Advertising Trends 2006, Yearly Statement Google 2004-2006, eMarketer
27 Nov 08 ACE conference 2008 Budapest 15 Estimated market share of DoubleClick (measured by expenditure; very rough estimate)
Online advertising Share of Total Online Advertising related revenues given revenue percentage received from advertisers US$ Million 5% Share of Total (%) 10% Share of Total (%) 100 2000 7.318 1000 3.659 150 3000 10.977 1500 5.488 300 6000 21.954 3000 10.977
Source: Internet Search, WARC 2007, own calculations
27 Nov 08 ACE conference 2008 Budapest 16 II. Elimination of potential competition
Eliminating Google from stand alone ad serving products i. DoubleClick currently sells ad serving products ii. Google has significant advantages for entry into the ad serving market given its current ad serving experience (AdWords/Sense) iii. Yahoo! and MSN do not possess the same advantages; they attract fewer advertisers and publishers, and would incur significant costs to convert proprietary products for third party customers iv. Markets for ad serving products are concentrated; customer switching costs and fixed development costs create entry barriers and make entry by others difficult v. Prior to announcing the merger, Google reportedly was testing an ad serving product that would compete with DoubleClick
27 Nov 08 ACE conference 2008 Budapest 17 II. Elimination of potential competition
Eliminating DoubleClick from ad exchanges i. Google currently functions as an ad exchange by bringing advertisers and publishers together via various automated products, including AdWords and AdSense ii. DoubleClick announced prior to merger plans to introduce an ad exchange iii. Because of its relationships with publishers and advertisers, DoubleClick has a unique ability to bring together sufficient buyers and sellers required for success (Barriers to successful entry with a new ad exchange include the need to attract liquidity from advertisers and publishers) iv. Few, if any, other firms have a network of publishers and advertisers as extensive as DoubleClick
27 Nov 08 ACE conference 2008 Budapest 18 III. Non-horizontal effects
Ability to foreclose (Google post-merger will open its network to DoubleClick ad serving products) i. Google can raise the price or degrade the functionality of DoubleClick products for customers that do not use Google’s network ii. Google can charge different prices to different customers, and price discriminate against customers least likely to switch from DoubleClick iii. Publishers and advertisers face relatively higher costs from switching ad serving products than switching ad networks (role of contracts!) iv. Publishers will divert ad network volume to Google to avoid costs of switching away from DoubleClick
27 Nov 08 ACE conference 2008 Budapest 19 III. Non-horizontal effects
Incentive to foreclose i. Google faces competition in providing intermediation services to advertisers and publishers ii. Google can leverage DoubleClick’s position in ad serving products to lead volume from competing ad networks to its own network iii. Google will capture the margin on intermediation on volume that is diverted iv. The profitability of such a strategy is enhanced by Google’s ability to selectively increase prices to existing DoubleClick customers
27 Nov 08 ACE conference 2008 Budapest 20 III. Non-horizontal effects
Effect of foreclosure
i. Ad networks are characterized by network effects: advertisers and publishers prefer to use the same network/exchange others use ii. Winning business from competing networks could reduce their ability to compete and make them less viable due to the loss of network effects iii. If competing ad networks are weakened, Google can charge higher prices for intermediation services without losing significant volume
27 Nov 08 ACE conference 2008 Budapest 21 Outlook
• Google states in their SEC filings: − „We acquired DoubleClick primarily for their customer relationship , as well as patents and developed technology” • Value of customer relationship 630Mill.$; • Value of patents and developed technology: 143Mill.$ − “Customer relationship have a weighted average useful life of 6.7 years” > This evidence goes against efficiency driven merger and confirms significant switching costs
• Google not listed as ad network mid 2007 by comScore; now already top 3 > Google successfully expands its market position into market segment of ad networks
• Google’s planned but abandoned cooperation with Yahoo shows way forward
27 Nov 08 ACE conference 2008 Budapest 22 comScore Ad Focus Ranking (U.S.) July 2008: Total U.S. - Home, Work and University Locations - Source: comScore Media Metrix
Rank Property Unique Visitors Reach % Rank Property Unique Visitors Reach % (000) (000) Total Internet : Total Audience 189,134 100% 1 Platform-A**† 171,062 90% 26 Undertone Networks** 81,372 43% 2 Yahoo! Network** 160,355 85% 27 Centro 78,276 41% 3 Google Ad Network** 153,529 81% 28 MYSPACE.COM* 75,295 40% 4 Specific Media** 153,258 81% 29 Vibrant Media** 73,978 39% 5 ValueClick Networks** 148,401 78% 30 Ybrant - Oridian - ADdynamix Network** 73,461 39% 6 Tribal Fusion** 142,736 75% 31 YOUTUBE.COM 73,322 39% 7 Yahoo! 138,309 73% 32 NNN Total Newspapers: U.S. 69,184 37% 8 YuMe Video Network - Media Partners †† 136,455 72% 33 Gorilla Nation Media 65,759 35% 9 Google 133,184 70% 34 Ask Network 58,566 31% 10 adconion media group** 130,155 69% 35 MSN.COM Home Page 57,585 30% 11 Casale Media Network** 129,944 69% 36 EBAY.COM 57,007 30% 12 Traffic Marketplace** 127,758 68% 37 IAC Ad Solutions – Media Partners 54,639 29% 13 DRIVEpm** 125,312 66% 38 TattoMedia** 53,854 28% 14 Revenue Science** 123,381 65% 39 Kontera** 53,328 28% 15 interCLICK** 122,496 65% 40 AMAZON.COM 48,336 26% 16 24/7 Real Media** 120,359 64% 41 MapQuest 47,441 25% 17 AOL Media Network 111,396 59% 42 Vizi Inc** 47,408 25% 18 CPX Interactive** 110,918 59% 43 NNN Top 25 47,178 25% 19 MSN-Windows Live 105,967 56% 44 Real Cities Network 47,075 25% 20 Tremor Media - Media Partners 104,687 55% 45 IB Local Network 47,029 25% 21 ADSDAQ by ContextWeb** 103,431 55% 46 PrecisionClick** 43,605 23% 22 Turn, Inc** 93,171 49% 47 AdOn Network** 42,655 23% 23 Burst Media** 91,054 48% 48 Epic Advertising (Azoogle Network Only)** 40,435 21% 24 Collective Media** 89,56 47% 49 FACEBOOK.COM 39,087 21% 25 AdBrite** 81,52 43% 50 EBAY.COM Home Page 38,732 20%
* Entity has assigned some portion of traffic to other syndicated entities. ** Denotes an advertising network. † The Platform A ad network is an aggregation of ad servers used by the following individual advertising network entities: Advertising.com, Tacoda, AOL, Quigo and Userplane. †† comScore has verified that a legitimate business relationship exists between YuMe and Microsoft through documentation provided. Therefore the YuMe Video Network – Media Partners entity meets all current rules for inclusion as a custom entity in the Ad Focus category.
27 Nov 08 ACE conference 2008 Budapest 23