Google Knows Its Ad Exchange Isn't Worth its 20% Fee, but Refuses to Lower It.

Publishers were willing to forego revenue to escape Google's control, but Google coerced them into using AdX to charge a higher fee than any other ad exchange in the business.

Week one of the government’s second landmark antitrust case against Google is in is in the books, and below you can read about the key evidence we saw on Days 4 and 5 of US v Google. But before we get into a more exhaustive summary, let’s take a step back and talk a little about the legal theory underlying much of the testimony we heard in Week One.

Let’s talk about “tying.” Tying is a form of anti-competitive conduct and a violation of Section 1 of the Sherman Act, our foundational antitrust law. To prove a claim of tying in this case, the government must show that Google conditioned the sale of one product on the purchasing of a different “tied” product. Here, that means the tying of Google’s ad exchange, AdX, and Google’s separate publisher ad server, DoubleClick for Publishers or “DFP.”

The government must also show that Google possessed sufficient market power to restrain market competition through the tie. To make that case, the government has alleged that Google leverages its whopping 91% share of the publisher ad server market to restrict competition among rival ad exchanges.

Of course, it’s extremely lucrative for Google to engage in this allegedly anti-competitive conduct. By restricting competition among ad exchanges, Google is able to charge a 20% fee on every ad dollar that moves through its exchange, which is higher than any other third party ad exchange, and higher than what Google would be able to charge in an optimally competitive market. The government has alleged that publishers – which include every website on the open web that hosts digital ads – have lost hundreds of millions of dollars because of Google’s monopoly take rate.

So to understand the technical mechanism behind the decline of the open web - or why thousands of newsrooms have shuttered over the past two decades - you have to understand this concept of tying. And this week, the government built that testimony with witnesses from across the digital advertising spectrum, from advertisers to publishers to independent ad exchanges that are scraping for shares of the open web digital advertising pie.

“I think we are all in agreement that ‘exchange functionality’ is not worth 20%.”

With that context, you’ll appreciate why the below exhibit is perhaps the most damning piece of evidence that we’ve seen yet. This is from an email authored by Chris LaSala, Google’s long-time Director of Publisher Platforms:

Let’s break it down. Open web digital advertising is a complex marketplace where value is exchanged between various market participants. When advertisers pay to put their ads on an advertising exchange, they do so with the expectation that the exchange will match their ads to the most valuable inventory for maximizing impressions and driving performance.

In the above email, a Google executive directly acknowledges that Google’s ad exchange, AdX, is “not worth 20% and value comes from sourcing demand.” So why, then, is able to charge a 20% fee, higher than any other ad exchange on the market? Well, because Google is leveraging the advertising demand they source through their ad exchange to compel publishers to use Google’s publisher ad server (DFP).

That’s an extraordinary admission of anticompetitive conduct, but it doesn’t mean that the government can rest. We now anticipate that the government will complete its affirmative case by the end of next week, about a week ahead of schedule and a lightning pace compared to the 10-week Google Search trial. Then Google will present its case that the government is looking at this all wrong. That Google in fact competes with “walled garden” ad exchanges, like Meta and TikTok and Amazon, even though Google is utterly dominating the open web digital advertising market.

Google is also expected to argue that all of their coercive behavior, from the imposition of Unified Pricing Rules to restricting Real-Time Bidding to DFP publishers, had pro-competitive rationales. If the government keeps hammering evidence like that we’ve seen this week, Google’s burden is going to be difficult to meet.

Other high-level takeaways from the past couple of days:

• Google acknowledged that publishers were willing to tolerate some revenue loss in exchange for being less dependent on Google.

• Google contemplated lowering its 20% exchange fee to better align value with revenue, at “risk of more platform competition,” and then didn’t.

• In audio clip, ex-Googler Rahul Srinivasan compared ad exchanges to financial markets. Stephanie Layser (former NewsCorp) fired back, “the difference is that the people who run financial markets are not also competing in them.”

• Publishers were unable to switch from Google due to its massive scale and inventory.

• More evidence of Google’s bad behavior, as communications show that Google employees invoked fake privilege and deliberately moved chats to “history off” mode.

• The government could rest its case next week, following highly-anticipated testimony of long-time Google digital ad executive Jonathan Bellack.

More detailed summaries below.

Day 4

Witness: Rahul Srinivasan, Xoogler

Mr. Srinivasan testified that before header bidding, when AdX competed in an open auction, AdX had the benefit of real time bidding while other exchanges competed on static items. Real time bidding takes into account many factors about a potential impression, allowing for that impression to be evaluated in a more dynamic way, while static items do not.

Mr. Srinivasan was asked if Google viewed header bidding as a competitive threat, to which he answered that it was “one of many,” a phrasing he would repeat throughout his testimony. While I have no insight into what coaching or preparation went on with these Google and ex-Google witnesses, it is palpable how when the government approaches the sorest areas for Google, in this case, market definition, and the extent to which Google faces competition, we get canned answers.

This made me recall fellow Googler Brad Bender, who on Day 3 made repetitive use of a phrase with respect to a different area where Google is exposed (destroying evidence) by repeating verbatim, whenever he was asked, that “substantive communications” [at Google] would occur in “an email, [in] a document, or in a meeting.”

What was most remarkable about this witness is how much he claimed he could not remember. While he remembered almost every individual at Google he was questioned about, when it came to Google’s conduct or particular events, he claimed not to remember—demurring more frequently than any witness we’ve seen yet.

A Google email was put up where concerns were expressed about the ability of publishers to “diversify” away from Google.

Judge Brinkema eventually had enough of the witness’s penchant for circuitous, inconclusive answers, and instructed him to answer yes or no.

Srinivasan was questioned about another email where Google is discussing disabling publishers’ ability to set “variable” price floors, to the benefit of AdX. Mr. Srinivasan agreed that this is what was being discussed in the exhibit.

In another exhibit, a Google slide deck, Google details how header bidding technology made 3^rd party yield solutions more attractive, undermining the value of Google’s publisher-facing ad tech platform, DFP (DoubleClick For Publishers, also known as “DRX” internally) as a “must call” platform.

In other words, when header bidding was allowed to compete with Google, its monopoly power was diluted. Google knew it, and deployed strategies to curb header bidding. In one slide, below, Google contemplates reducing their AdX fee (or “revshare”) from 20% to 15%, to “better align value/price” and make “AdX more price competitive.” The slide also acknowledges that the value of AdX is intrinsically linked to its publisher ad server, where Google commands an over 91% market share.

The downside for Google? “Risk of more platform competition/disintermediation of ad serving.”

(PTX0611, Google Presentation, “DRX Unified Yield Management Strategy Review,” July 9, 2018; Source: https://www.justice.gov/atr/media/1367561/dl)

Note also that Google perceives “header bidding” as a way for non-Google ad exchanges to “free-ride” on Google’s DFP publisher ad server. By the same token, though, Google’s AdX exchange can only justify a 20% fee because it is tied to its dominant publisher ad server. That “tie” is among the government’s numerous allegations of anticompetitive conduct.

For Google, evolution of their ad network is a constant exercise in getting publishers to pay more, and to undermine competition from non-Google exchanges. In a key exhibit, an email exchange between Srinivasan and Nitish Korula, a Research Scientist at Google, the parties acknowledge that publishers “[had] been willing to tolerate some revenue loss in exchange for reduced dependence on Google as a whole.” Google’s response was not to lower their fee to make their platform more attractive to publishers, but to impose Unified Pricing Rules and other tools to undermine the competition introduced by header bidding.

(PTX0609, Email from Martin Pál to Nitish Korula et al., May 31, 2018; Source: https://www.justice.gov/atr/media/1367556/dl)

Later in the day, the government played a recording of an April 2019 meeting in New York City where publishers, including Stephanie Layser, expressed displeasure to Google, stating that “while yield is important, control is important too.”  In the recording, Mr. Srinivasan says that he compares ad markets with financial markets, to which Ms. Layser says, “the difference is that the people who run financial markets are not also competing in them” (paraphrased).

In a separate audio recording introduced by the government, another publisher tells Google, “You have made it impossible for any of us to discover yield with anyone but Google. Isn’t that a monopoly?”

If it looks like a duck and quacks like a duck…

Revolving Doors and Fake Privilege

Turning from the substance to the government’s allegation that Google abused the litigation process, many of Mr. Srinivasan’s emails had “PRIVILEGED and CONFIDENTIAL” at the top or were tagged as being for seeking legal advice—an anti-litigation prophylactic added to emails in the event a case just like this were to one day come to pass, to try and keep the emails out of discovery.

The problem for Mr. Srinivasan – and Google – is that he was not asking for legal advice in the emails, which the government called him on. When asked to identify where in the emails he was actually seeking legal advice, he reluctantly admitted that he was not.

Over time, it became evident Mr. Srinivasan was intent on hedging or qualifying his answers to the furthest possible extent, to the point of objections, and interjections from the judge, and claiming to be unable to recall as frequently as could be, until there was no choice but to answer straight.

I wrote in my notes that Julia Tarver Wood, Senior Litigation Counsel at the Justice Department and the lead attorney in this case, was having a very strong day. You could tell she really had this line of inquiry well prepared. As a quick note, Ms. Wood practiced at Paul Weiss, the same law firm as Google’s lead attorney, Karen Dunn, for 25 years, before coming to the Justice Department in early 2023.

On the Google legal team, Jeannie Rhee, who is also of Paul Weiss and has handled some of the witnesses, previously served as deputy assistant attorney general under Eric Holder during the Obama Administration, represented Hillary Clinton during her email server controversy, and represented ex-Obama national security advisor Ben Rhodes in a 2015 racketeering case.

There’s a broader context here: There’s a good deal of collegiality among the attorneys on each side. I’ve noticed in the morning this (somewhat odd) game of sorts where the lawyers and even the court officers take turns spinning their swivel chairs as fast as possible. They joke around in the breaks, and seem generally pleasant among one another.

While much has been made of Karen Dunn’s apparent conflict of interest given her role with the Kamala Harris campaign (Ms. Harris’ administration is currently bringing the suit against Ms. Dunn’s client), the “revolving door” is alive and well in Washington, in few places more prominently than in this case. Lawyers on the high end, in big law, the Department of Justice and other agencies, counsel at companies like Google, are continuously moving between different sides, different shops, waiting out opposing administrations by going to firms representing corporate interests trying to merge and acquire one another, before rejoining the government to try and break them up again.

For this elite game of musical chairs to work, there has to be a certain sense of humor and level of collegiality, even under the guise of the adversarial process that is at play. As someone who has worked in both big law and the DOJ, I’ve always found this dynamic fascinating, but also somewhat disconcerting, and perhaps rightfully distrusted—thought of as “the swamp” by ordinary Americans looking up at a system that does not seem to be working for them, but often for itself.

For more detailed Day 4 summaries, including the testimony of Jed Dederick (The Trade Desk), Rakeev Goel (Pubmatic), and Tom Kershaw (Magnite), check out Arielle Garcia’s extremely good transcriptions here.

Day 5: Tom Kershaw, Chris LaSala, and more

Day 5 began 30 minutes later than usual as Judge Brinkema tended to other matters on her docket. With it also being a Friday – Friday the 13^th no less – things were a bit quieter outside the courtroom to start the day.

We’ve been burning through this trial at an unexpected clip. According to courtroom chatter, the government is expected to be finished with its case next week, which will include the highly anticipated testimony of Jonathan Bellack, who essentially spent 15 years at the top of Google’s digital ad tech policy chain before departing to Harvard’s Applied Social Media Lab.

Witness: Tom Kershaw, former CTO of Magnite, co-founder of PreBid.org

Mr. Kershaw, former CEO of independent supply-side ad server Magnite, presents as a subject matter expert. He’s a comparatively older gentleman relative to the other witnesses and has been in the industry since the advent of many of the technologies at issue. He was able to walk the Court through the evolution of a number of the issues in this case in impressive detail.

Mr. Kershaw gave interesting testimony with helpful examples as to the difficulties small businesses face when trying to advertise in this environment. He told the Court about how it is not economically viable for advertisers to conduct significant sales efforts with respect to signing up ad campaigns from small businesses. The man hours are simply not worth it given the very limited ad spend from a local pizza place or local car dealership.

However, these types of businesses benefit greatly from being advertised within Google Search, as people often run searches for these types of businesses in their local community, when trying to get a pizza or find local car dealers for example. Google’s dominant existing search product is already in place to capture this action.

When asked if Google’s ad exchange made it easier to compete with Google, Mr. Kershaw said that the opposite was true. Google can see everyone else’s bids, but the inverse is not true, a massive advantage for Google.

On cross examination, Google’s lawyer, Eric Mahr, who has not yet taken the first chair during this trial (a fact Judge Brinkema kindly acknowledged) asked if open-source header bidding software PreBid can place ads without Google, to which he said no.

Google then tried to impeach Mr. Kershaw using a document from PreBid that is a guide for users on how to try and do precisely that.

Mr. Kershaw suggested it is so difficult to do as to be impossible. In his words, he said that he could technically “walk to China,” but that it’s obviously not actually feasible in reality.

It has by now been well established that Google (AdX’s) dominant scale was something publishers wanted, if not outright needed.

One of the more notable lines of the day came when Mr. Kershaw was asked if PreBid’s Javascript suite could work without Google, to which Mr. Kershaw replied that it could, the same way one could starve themselves, but that doesn’t make it a good idea.

The reality of Google’s strong network effects and dominant scale, as well as technical measures to stymie potential rivals, has become routine testimony with each witness—a cycle of advantages that cannot be broken.

Witness: Chris LaSala, former Google Managing Director of Publisher Platforms Strategy

Next, Chris LaSala was called to the stand. His testimony dominated much of the day.

An important thing to note with respect to Mr. LaSala’s testimony that would not otherwise be apparent to people following along in this trial from the outside, is the extent to which he is a regular character in this litigation, having been deposed and prepared for such depositions and testimony numerous times—and the practice reps show.

He is an astute businessman, a professor of his trade at Columbia Business School, and the exhibits in the trial containing his emails reveal a savvy and tactful professional with a deep understanding of the subject matter at issue in this case.

In court however, Mr. LaSala engaged in a pattern of claiming to fail to remember, or to be unfamiliar with the balance of the most damning evidence against Google (very similarly to Rahul Srinivasan’s testimony on Day 4) only to then launch into impressive explanations of certain business concepts and conduct at Google, when the events in question were less problematic.

This trend was most apparent (as was the case with Mr. Srinivasan’s testimony) when direct examination turned to the heated issue of Google’s “Communicate with Care” policies and his retention (or lack thereof) of key evidence.

Mr. LaSala was questioned about Google’s discounting policies, and it was established he tried to discount Google’s take from publishers only when absolutely necessary. Jonathan Bellack appeared routinely on the emails in these exhibits, further raising the stakes and anticipation of his testimony that is expected to come early next week.

Another exhibit contained an email where it was discussed that AdX’s sell side fee of 20% did not exist because of a value proposition, but because AdWords has unique, and quite frankly unmatchable demand, and is not available without going through Google.

Damning evidence was then presented related to Google’s destruction of evidence—chat logs where Mr. LaSala instructed colleagues, in this case colleague Nash Islam, to turn chat history off when sensitive issues were being discussed.

This was said to have occurred a year after receiving a litigation hold.

Another email from Mr. LaSala advised employees not to email on topics related to investigations unless Legal was involved—and thus the emails could be considered legal advice and privileged, or at least falling under this pretext.

At one point Judge Brinkema did admonish the government for not reading Mr. LaSala’s full answers (in other words, only reading the sentences favorable to the government) when reading from his deposition testimony.

Nonetheless, the government was feeling its oats—the exhibits spoke for themselves.

Cross examination began with Google lawyer Bill Isaacson. In one of the exhibits here on cross there was an email discussion notable for the fact it was not beneficial for Google—executives were discussing trying to take potential rivals’ advantages away from them by sitting upstream from them in the adtech plumbing.

Alternatively, emails were also presented on cross where Mr. LaSala and others expressed what seemed to be real fears of Amazon and Facebook becoming true rivals, and a sense those companies had stronger abilities to collect and use data for targeted ads than Google had, and that Google had to compete in this way, as opposed to “extracting irrationally high rent from AdX.”

These were interesting emails. I had wished counsel spent more time on them because there did appear to be legitimate concern inside Google for growing competition as evidenced in these exhibits, as opposed to lawyers merely looking to create a pretense of a competitive market through their questioning.

Of course, the quote of Google describing its own practice as “extracting irrationally high rent” requires no explanation.

For additional Day 5 summaries by Luke Lambert (OMD USA), Arnaud Creput (CEO of Equative), and Brian Boland (former VP of Partnerships at Meta), check out the September 13 update at usvgoogleads.com.