Scandal of FTC Burying Staff Analysis of Google's Search Advertising Monopoly Power

03/26/2015 12:59 pm ET | Updated May 26, 2015

When the Wall Street Journal accidentally got their hands on an original staff report from the Federal Trade Commission's antitrust investigation of Google, many in the media focused on where the FTC staff report on Google differed from the conclusions of the FTC commissioners on whether Google's favoring of its own properties in its search engine unfairly hurt rival "vertical" content providers.

Now, politically accountable officials can and should disagree with often-overeager staff on the conclusions of their work, but it is problematic that the shockingly short original decision of the FTC ignored so much of the evidence supporting the staffers' argument for action against Google.

But the real scandal out of the revelations of the staff report is that the FTC commissioners didn't even address the staff arguments that Google was not just undermining competition in search engines but dominating search advertising to such an extent that no rival could viably challenge it.

Originally I, like many others, thought the FTC commissioners' decision was weak because they had ordered too narrow an investigation (just looking at search dominance vs. competing verticals and ignoring the advertising side of the business model). But no, the staff report has extensive analysis of the advertising side and how Google's exclusive contracts, higher monetization rates and other actions make it impossible for competitors to challenge it.

The FTC Commissioners Barely Acknowledged Google Was in the Advertising Business

Reading the original FTC decisions, you'd barely know Google made all of its money from advertising customers, not from users of its search engine. And aside from condemning a practice of Google's of not allowing third-party software to be used with its own AdWords site along with rival sites, there was essentially no discussion by the commissioners of anticompetitive actions by Google in the advertising side of its operations.

But then you read the staff report and a gusher of analysis of the search advertising marketplace emerges. Questions that antitrust scholars like myself had asked fruitlessly for lack of data were addressed by FTC research staff, yet the data was neither made public nor even discussed by the commissioners.

In fact, this kind of research for the public is the least of what the FTC should be doing, even if it doesn't take direct action, yet instead the commissioners buried the report and its data.

That is the real outrage.

The original decision by FTC focused almost solely on whether Google's practices gave it a monopoly in search without saying how it impacted its search advertising dominance. In fact, it's quite possible that its actions in search could benefit users of its search engine while systematically giving it such dominance that advertisers would have no choice but to advertise on Google. That would diminish competition and hurt advertisers -- who are consumers of Google's advertising product -- and constitute clear anticompetitive behavior, as the FTC staff report argued, yet the commissioners did not even address that key issue.

FTC Staff Found Google Had Locked Rivals Out of Syndicated Publishing

One area where the staff report provided extensive data previously unavailable was the extent to which Google locked down publishers across the Internet to use only its search and advertising products to the exclusion of its rivals. As the report detailed:

Google's exclusive AFS agreements effectively prohibit the use of non-Google search and search advertising within the sites and pages designated in the agreement. Some exclusive agreements cover all properties held by a publisher globally; other agreements provide for a property-by-property (or market-by-market) assignment. (p. 54)

Tellingly, even where agreements were not officially exclusive, the details "favoring" Google essentially excluded those rivals in any case. One example cited was eBay, "Google's largest search and search advertising syndication partner," which accounted for over 27 percent of all syndicated U.S. queries answered by Google in 2011. eBay itself characterized its contract with Google "as equivalent to exclusivity" (p. 58). Details of that contract included requirements that eBay show as many Google AdSense ads on each page as third-party advertisements, that no third-party advertisements appear above the Google AdSense advertisements, that Google AdSense advertisements not be interspersed with third-party advertisements, and that Google AdSense advertisements not be less prominently displayed than third-parry advertisements.

Overall, the FTC staff found that Google had exclusive or restrictive agreements with 12 of the top 20 companies, 60 percent of that group which in turn accounted for 94 percent of total search query volume (p. 104).

When a company with an overwhelming dominance of search and search adverting is locking rivals out of so much of the marketplace, it seems that the FTC commissioners should at least discuss why this isn't a problem.

The Barriers to Entry for Google's Rivals

The FTC staff report also detailed how unlikely it is that rival companies are likely to challenge Google in search advertising since they can't get the scale or data to create a comparable product. Google already has 71 percent of all U.S. search, according to the staff report (p. 68), with only one significant competitor, the Bing/Yahoo! search alliance. But when they surveyed advertisers themselves, they found that essentially none was using Bing/Yahoo! over Microsoft, while many were almost exclusively using Google. In a telling quotation, the staff report noted:

A smaller publisher reported that, essentially, the only websites exclusively using Bing's search syndication service today are those that have been kicked out of Google's syndication network for violating its terms of service. While we know from other interviews that this comment is an exaggeration, it does capture the general tone of the comments we received about the relative quality of Microsoft's search and search advertising syndication product. (p. 56)

The problem for challengers is not only that they get far fewer queries than Google but that when one of their users clicks on an ad, those advertisers make less money on each click. Amazon is the second-largest advertiser after eBay and has no similar exclusionary contract with Google. However, Amazon reported to the FTC that the Bing and Yahoo! advertisements monetize at about 46 percent the rate of Google's advertisements. Because of this "large monetization gap," Amazon told the FTC that it only used Bing and Yahoo! for a very small percentage of its total search syndication needs (p. 60).

Why rivals monetize ads at such a lower rate is something I analyzed at length in my law reviews, "Search, Antitrust and the Economics of the Control of User Data" and "The Costs of Lost Privacy: Consumer Harm and Rising Economic Inequality in the Age of Google," but the FTC staff report summarized the problem as stemming from the cycle of more users and more data strengthening the ability of Google to deliver cost-effective ads to its advertisers:

More users also leads to an increased number of advertisers ... as the number of advertisers that place ads -- and the number of consumers who click on those ads -- increases, the ad-serving algorithms improve their ability to predict what advertisements stimulate consumer "clicks." This in turn increases monetization, which leads to the cyclical effect of greater participation by both advertisers and publishers. This effect, which has been termed the "virtuous cycle," represents a significant barrier for any potential entrant. (p. 76)

The FTC noted that this was not their analysis but came from Google itself:

Google documents are replete with references to the "virtuous cycle" among users, advertisers, and publishers; and testimony from Google executives confirms the continuing viability of the "cycle." (p. 16)

Just the sheer scale and cost of buying servers and continual research costs means that any rival is having to support fixed costs with a far lower rate of monetization and fewer users, creating almost no path to financial viability for a Google competitor.

The Legal Basis for Challenging Google's Dominance of Search Advertising

The FTC staff addressed one other key issue that is most clearly in their area of competence, namely the legal basis for taking on Google's dominance of search advertising. One question raised by opponents of such action is whether the proper market analysis should be of Google's role in the overall advertising marketplace, within online advertising as a whole, or just within search advertising as a discrete market.

The FTC staff argued strongly that the proper analysis was of Google's role within search advertising, based on the testimony of advertisers themselves of how different the role of search advertising was compared with other forms of advertising.

First, "advertisers believe that search advertising provides unprecedented precision in identifying potential customers, measurability, and the highest return on investment" (p. 10). Functionally, "'search ads help satisfy demand' while 'brand advertising helps to create demand." This latter distinction was lifted from none other than Google's own chief economist, Hal Varian. Notably, search advertising is priced quite differently from other forms of advertising (i.e., advertisers get paid only when they click on a link), while advertisers pay for other online ads whenever a user sees them (p. 70).

The FTC staff report quoted from Google's own internal documents and testimony that there was "no viable substitute for search advertising. Both Ad Words vice-president of product management Nick Fox and chief economist Hal Varian have previously stated that search advertising spend does not come at the expense of other advertising dollars" (p. 72).

The FTC also noted that in other cases, the FTC and Department of Justice had argued themselves that search advertising was a distinct product market, including when Google benefited from the distinction in arguing that its purchase of the display advertising company DoubleClick had no antitrust implications since it was in a distinct market from Google's search advertising business.

The FTC Commissioners Should Not Bury Facts They Don't Like but Instead Provide Counterarguments

As noted above, FTC commissioners have no obligation to agree with their staff, but they do have a political obligation to the public not to bury facts they disagree with. The public has the right to know the results of investigations conducted with public dollars, and the right to have officials such as the FTC commissioners respond publicly to the facts uncovered by such staff reports.

If they need to cover up a company name here or there to protect proprietary secrets, so be it (although that excuse is used far too much), but public officials like the FTC should be obligated to respond to the broad substance of staff reports. They can disagree, but they should provide alternative facts or analyses to win their arguments, not bury facts and analyses that are too inconvenient and too challenging to respond to or refute.

Instead of apologizing to industry, as they did, for supposedly violating corporate confidentiality, they should be apologizing to the public for breaching our trust that they won't bury such inconvenient data.