The antitrust relevance of yesterday's New York Times reported quote: " ...marketers increasingly want to combine their purchases of search and display advertising." has really quite profound implications for the pending Google-Double-Click deal.
What that quote does is zero in on what really matters to FTC antitrust authorities -- how would the transaction actually change the current competitive dynamic, or more specifically, how would the merger "substantially lessen competition," which is the legal standard for approving/disapproving mergers.
On the positive side, Google can legitimately argue that this transaction is simply their attempt to meet their customer's demand for more efficiency and integration between search and display advertising.
And it is the analysis of that last point that approval of the merger could hinge. Why is that?
If Google and DoubleClick enjoy dominance/market power in their respective search and display advertising segments as the market share information indicates,
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Combining these aundiences, networks, databases and tools synthetically through acquisition, and not organically through competition, will enable Google-DoubleClick to meet this market need much faster than either company could do by itself.
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If the dominant market leaders with ~60% share respectively in their segments need to merge synthetically to meet this market need because they can't do it organically on their own, what does it suggest about the feasibilty of remaining competitors being able to meet this market need in a competitive timeframe that disciplines the market?
The outlook for this merger will hinge on the FTC's assessment of whether remaining market forces would be sufficient to "cure" any potential anti-competitive effects from approving the merger.
So specifically what are the potential anticompetiive effects of a Google-DoubleClick merger that market forces could not "cure?"
There are at least four anti-competive effects of this merger that would not exist but for this merger:
1. Search and ad-serving network effect:
- Google and DoubleClick could cross-leverage Google’s knowledge of the search results that yield the highest click per action payments and DoubleClick’s knowledge of which advertisers want to pay the most, and marry them to their potential self-dealing advantage as the market’s intermediary without being subjected to market forces discipline.
- These companies know first that display advertising is the best way increase brand awareness on the web, and second that increased brand awareness drives more cost-per-action clicks.
- By managing both the search and display ad algorithms, the merged companies would have the opportunity and incentive to collude to nearly perfectly target their display ads to optimize Google’s click performance.
- The powerful network effect between the search performance model and display ads can create a self-dealing “feedback loop� where they can secretly optimize the display algorithm to optimize Google’s cost per action algorithm.
- This type of self-dealing arrangement would create a further disincentive to detect fraudulent clicks, an industry and Google problem that is far from being brought under control and that harms advertisers and users.
- In effect, Google could preferentially target display ad inventory where Google knows it has the highest priced click per action rate, shortchanging both the advertiser with mis-targeted ads and the user with conflicted results that serve Google-DoubleClick more than the search user.
2. Monetization network effect:
- Since monetization is driven by both the volume and efficiency of matching advertisers with content and users, the combined volume of these two global leaders’ user, advertiser and content provider bases, creates a monetization architecture which no other targeted online advertiser could ever hope to match.
- With no realistic alternative monetization architecture, the merged companies could raise ad prices for advertisers and also increase prices for content providers by negotiating a better revenue sharing split from their Google ad network partners.
3. Click data & performance measurement network effect:
- By being able to combine the world’s largest databases on consumer click behavior today and historically, the merged company could bundle or tie the use of this consumer behavior metadata with the use of their performance measurement or analytics tools.
- Google-DoubleClick could then deny competitors access to their dominant share of consumer behavior summary metadata necessary to manage large global online advertising campaigns, thus ensuring that competitors have an inferior view of the overall market and inferior performance measurement because of the inferiority of available data.
- Google-DoubleClick could also bundle or tie DoubleClick’s ad-serving for publishers with its ad-serving for advertising further disadvantaging competitors like 24/7 Real Media or Atlas.
- Advertisers and content providers would both be vulnerable to higher prices for performance measurement tools and metadata because they would have no viable alternative competitive choice of which to avail themselves.
4. Advertising exchange/brokering network effect:
- The combination of the two dominant players in counterpart market segments, Google on the consumer demand/buy side through search dominance, and DoubleClick on the advertiser supply/sell side through ad-serving dominance, would enable the combined company to see most of both sides of the market.
- Their dominant view of overall market information would give the combined entity the capability and the incentive to manipulate the market to their de facto market making advantage, fix prices for long tail advertisers and content providers, raise prices where competitors are weak, and predatorily price serially where competitors are strongest to foreclose competition long term.
In the end, the FTC has to decide whether these and other anti-competitive concerns warrant blocking the merger.
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I continue to believe the FTC will block Google-DoubleClick because the more the FTC learns about this market, the more skeptical they will become that the competitive market forces left over from this transaction will be sufficient market discipline to mitigate the potential anti-competitive effects I specifically explain above.
