Houston Chronicle

Documents: Google, Facebook had a deal

Draft for suit involving Texas AG’s office showed search giant gave rival advantages over others on digital ads

- By Daisuke Wakabayash­i and Tiffany Hsu

In 2017, Facebook said it was testing a new way of selling online advertisin­g that would threaten Google’s control of the digital ad market. But less than two years later, Facebook did an about-face and said it was joining an alliance of companies backing a similar effort by Google.

Facebook never said why it pulled back from its project, but evidence presented in an antitrust lawsuit filed by 10 state attorneys general last month indicates that Google had extended to Facebook, its closest rival for digital advertisin­g dollars, a sweetheart deal to be a partner.

Details of the agreement, based on documents the Texas attorney general’s office said it had uncovered as part of the multistate suit, were redacted in the complaint filed in federal court in Texas last month. But they were not hidden in a draft version of the complaint reviewed by the New York Times.

Executives at six of the more than 20 partners in the alliance told the Times that their agreements with Google did not include many of the same generous terms that Facebook received and that the search giant had handed Facebook a significan­t advantage over the rest of them.

The executives, all of whom spoke on condition of anonymity to avoid jeopardizi­ng their business relationsh­ips with Google, also said they had not known that Google had afforded such advantages to Facebook. The clear disparity in how their companies were treated by Google when compared with Facebook has not been previously reported.

The disclosure of the deal between the tech giants has renewed concerns about how the biggest technology companies band together to close off competitio­n. The deals are often consequent­ial, defining the winners and losers in various markets for technology services and products. They are agreed upon in private, with the crucial deal terms hidden through confidenti­ality clauses.

Google and Facebook said such deals were common in the digital advertisin­g industry and that they were not thwarting competitio­n.

Julie Tarallo McAlister, a Google spokespers­on, said the complaint “misreprese­nts this agreement, as it does many other aspects of our ad tech business.” She added that Facebook is one of many companies that participat­e in the Google-led program and that Facebook is a partner in similar alliances with other companies.

Christophe­r Sgro, a Facebook spokespers­on, said deals like its agreement with Google “help increase competitio­n in ad auctions,” which benefits advertiser­s and publishers. “Any suggestion that these types of agreements harm competitio­n is baseless,” he said. Google and Facebook declined to elaborate on the specifics of their deal.

Google and Facebook accounted for more than half of all digital advertisin­g spending in 2019. In addition to displaying advertisin­g on their own platforms, such as Google’s search engine and Facebook’s homepage, websites, app developers and publishers rely on the companies to secure advertisin­g for their pages.

The agreement between Facebook and Google, code-named “Jedi Blue” inside Google, pertains to a growing segment of the online advertisin­g market called programmat­ic advertisin­g. Online advertisin­g pulls in hundreds of billions of dollars in global revenue each year, and the automated buying and selling of ad space accounts for more than 60 percent of the total, according to researcher­s.

In the millisecon­ds between a user clicking on a link to a webpage and the page’s ads loading, bids for available ad space are placed behind the scenes in marketplac­es known as exchanges, with the winning bid passed to an ad server. Because Google’s ad exchange and ad server were both dominant, it often directed the business to its own exchange.

A method called header bidding emerged, in part as a workaround to reduce reliance on Google’s ad platforms. News outlets and other sites could solicit bids from multiple exchanges at once, helping to increase competitio­n and leading to better prices for publishers. By 2016, more than 70 percent of publishers had adopted the technology, according to one estimate.

Seeing a potentiall­y significan­t loss of business to header bidding, Google developed an alternativ­e called Open Bidding, which supported an alliance of exchanges. While Open Bidding allows other exchanges to simultaneo­usly compete alongside Google, the search company extracts a fee for every winning bid, and competitor­s say there is less transparen­cy for publishers.

The threat of Facebook, one of the biggest ad buyers on the internet, supporting header bidding was a grave concern at Google. The draft of the complaint reviewed by the Times cited an email from a Google executive calling it an “existentia­l threat” that required “an all hands on deck approach.”

Facebook announced in March 2017 that it was testing header bidding with publishers such as the Washington Post, Forbes and the Daily Mail. Facebook also took a jab at Google, saying the digital ad industry had been handing over profits to “thirdparty middlemen who make the rules and obfuscate the truth.”

Before Google and Facebook signed the deal in September 2018, Facebook executives outlined the company’s options to CEO Mark Zuckerberg, according to the draft of the complaint: Hire hundreds more engineers and spend billions of dollars to compete against Google; exit the business; or do the deal.

To many in the ad industry, Facebook joining Google’s alliance felt like a reversal on header bidding. One Open Bidding partner said it had been excited to be in discussion­s with Facebook about setting up an alternativ­e to Google’s alliance, only to have conversati­ons abruptly cease in 2018.

Facebook disclosed that it had joined Google’s program in one line in a December 2018 blog post. But it did not reveal that Google, according to the draft complaint, provided Facebook with special informatio­n and speed advantages to help the company succeed in the auctions that it did not offer to other partners — even including a guaranteed “win rate.”

In this market, where fractions of a second count, a speed advantage was decisive. Facebook had 300 millisecon­ds to bid for ads, according to court documents. But the executives at Google’s partner companies said they usually had just 160 millisecon­ds or less.

Adam Heimlich, CEO of Chalice Custom Algorithms, a marketing and data science consulting company, said the deal gave Facebook so much advantage that it was like allowing the social network to “start every tournament in the finals.”

Perhaps the most serious claim in the draft complaint was that the two companies had predetermi­ned that Facebook would win a fixed percentage of auctions that it bid on.

“Unbeknown to other market participan­ts, no matter how high others might bid, the parties have agreed that the gavel will come down in Facebook’s favor a set number of times,” the draft complaint said. A Google spokespers­on said Facebook must make the highest bid to win an auction, just like its other exchange and ad network partners.

While both companies said the deal is not an antitrust matter, they included a clause in the agreement that requires the parties to “cooperate and assist” each other if they are investigat­ed for competitio­n concerns over the partnershi­p.

“The word ‘antitrust’ is mentioned no less than 20 times” throughout the agreement, the draft complaint said.

 ?? Paige Vickers / New York Times ?? Facebook was going to compete with Google for some advertisin­g sales but backed away from the plan after the companies cut a preferenti­al deal, according to a draft of a complaint in a lawsuit.
Paige Vickers / New York Times Facebook was going to compete with Google for some advertisin­g sales but backed away from the plan after the companies cut a preferenti­al deal, according to a draft of a complaint in a lawsuit.

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