Google's Ad Tech Business Faces More Pressure As EC Issues Statement of Objections

In This Note I Explore The Impact on Google From What Seems Like An Inevitable Separation

This week we saw another major effort by a governmental body to impact the competitive landscape for digital advertising, with the European Commission announcing that it has sent a Statement of Objections to Alphabet’s Google. They are “concerned that Google may have illegally distorted competition in the online advertising technology industry” after having “found that Google may have abused its dominant position by favouring its own adtech services.”   If the Commission finds that Google has acted illegally, it “might require Google to divest part of its services” which it illustrates as potentially involving the sale of its sell-side ad tech tools.   This follows on multiple antitrust complaints at the state and federal levels in the United States related to the same business currently working their ways through the courts, antitrust complaints directed at other Alphabet businesses and new regulations proposed or coming into effect in countries around the world which may have similar public policy objectives.

While I won’t opine here on the legal merits of the allegations, I think the sheer volume of attacks will eventually result in a separation of some or all of Google’s ad tech business, either because regulators or law-makers in the EU or the US succeed in their efforts or because Alphabet decides that it’s better to do so on their own terms.

Pros and Cons of Separating All Ad Tech: Impact On Other Google Businesses.  Putting aside for the moment that many of the concerns raised by the EC in its new Statement of Objections are solely related to practices within the ad tech business rather than across Google’s operations, it’s worth considering what a world look like with Google’s entire ad tech business separated from the rest of its operations.

First, the remainder of Google and Alphabet would probably be relatively unaffected in any externally noticeable way from such an outcome.  Presumably there are some synergies in terms of Google’s other products experiencing benefits from data that originates with ad tech.  On the other hand, the data that Google has access to through its other businesses, such as search queries, YouTube content consumption and device-based activity data that its Android operating system captures, one could argue that its data superiority would remain unparalleled with or without ad tech-related data, and therefore it won’t lose any commercial advantage as a consequence.

As another consideration, presumably there are some marketers who spend incrementally more with Google because it can serve as a “one-stop-shop” across search, video and display.  There are real benefits to having a single vendor of media in terms of tracking the impact of that spending.  But any marketer who is large enough will probably benefit more from diversifying their spend across multiple media owners both because different ad products from different media owners can be differently impactful for different marketers and because advertisers will generally be better positioned from a pricing perspective when they work with multiple vendors.   Overall, my guess is that the number of marketers who buy all of Google’s ad products but don’t buy from other media owners is relatively small.

Benefits of Ad Tech Independence.  Now consider what happens to the ad tech business if it were separated from the rest of Google.   I think any scaled business operating as a subsidiary of a much larger enterprise faces challenges competing for capital with other businesses.   Many factors can impact which subsidiaries are prioritized, and even if a business unit leader has compelling ideas around how to deploy capital, parent company management may have other ideas.   Under most circumstances the hope would be that revenue or cost synergies more than offset this capital allocation issue.    While we don’t know how meaningful those revenue or cost synergies are for ad tech at Google, it’s safe to say that if those operations were independent they could raise as much capital as they needed for any given purpose.

There are also bureaucratic costs to consider for any business unit operating as part of a larger one.  Similarly, the hope would have to be that revenue and cost synergies offset this downside.

More significantly and specifically to Google, as it stands right now, its ad tech businesses are almost certainly constrained in terms of their potential courses of action because of the heightened scrutiny it currently faces.   If we were to assume that Google saw meaningful advantages in buying any large independent company in the space, would it be able to do so?  Probably not.  Anticipating that regulators would block any meaningful acquisition means it’s probably not worth their while to even consider such options.   Even on matters that don’t involve M&A, Google has to be mindful that there will inevitably be more scrutiny on any action they take relative to the scrutiny their competitors face, which imposes real costs strategically and operationally.

Focusing on Buyers OR Sellers vs. Buyers AND Sellers: Either Can Work.  Moving on to consider the separation of the buy-side and sell-side of any given ad tech business, it’s notable that many companies within the industry have vacillated between providing products and services for one side of the industry vs. providing services focusing on both.    While most companies start out with a narrow focus given the go-to-market advantages of claiming fidelity to a narrow set of interests, over time circumstances often change.

In recent months, each of The Trade Desk, Magnite and Pubmatic and Nexxen have either announced initiatives or organized themselves via acquisition to expand offerings to both buyers and sellers, echoing efforts in the 2010s from AOL, Magnite’s predecessor Rubicon Project and Tremor Video (some of which is now part of Magnite and part of which is now owned by Nexxen).   A company that provides services to buyers and sellers might be able to drive operating costs down for any given action and might be able to provide significant value to both sides because of the enhanced visibility they have of the whole market, even though there are necessarily conflicting interests under these circumstances.   However, this isn’t necessarily bad if buyers and sellers are better off as a consequence of working with any of these companies vs. the alternative of doing otherwise.

Separating Google’s buy side or sell side, whether within Google or outside of it wouldn’t necessarily lead to better or worse outcomes for its current customers: it’s really hard to anticipate.  There could be a big commercial advantage in applying Google’s massive scale to a single side of the market for ad tech products and services, and different kinds of innovation narrowly focused on buyer or seller interests alone might follow.  Or we can imagine a world where two sides of a divided Google ad tech eventually provide their own end-to-end offerings, creating two even-more dominant players in ad tech out of Google’s business rather than one.