By Ryan Tracy and Jeff Horwitz
State attorneys general said in a lawsuit earlier this month
that a 2018 business agreement between two digital advertising
giants, Facebook Inc. and Alphabet Inc.'s Google, was an illegal
price-fixing deal. Lawmakers are calling for further investigation.
The companies say it was above board.
The Wall Street Journal viewed part of a recent unredacted draft
version of the lawsuit, which elaborates on allegations in the
redacted complaint filed in a Texas federal district court.
Ten Republican attorneys general, led by Texas' Ken Paxton, say
Google gave Facebook special terms and access to its ad server, a
ubiquitous tool for allocating advertising space across the web.
This and other conduct by Google, they allege in the final lawsuit,
harms competition and deprives "advertisers, publishers and
consumers of improved quality, greater transparency, increased
output and/or lower prices."
Previously unreported details from the draft, including contract
terms and company documents, shed light on the legal battle ahead
and the relationship between two tech giants who have called each
other competitors even as they hold an ever-widening share of the
digital advertising market.
A Google spokeswoman declined to comment on specific terms of
the deal. She said the states' "complaint misrepresents this
agreement, as it does many other aspects of our ad tech business.
We look forward to making our case in court."
Facebook, which isn't a named defendant in the case, also
disputed the states' claims.
"Partnerships like this are common in the industry, and we have
similar agreements with several other companies. Facebook continues
to invest in these partnerships, and create new ones, which help
increase competition in ad auctions to create the best outcomes for
advertisers and publishers. Any suggestion that these types of
agreements harm competition is baseless," the company said in a
statement.
Sen. Mike Lee (R., Utah), who is chairman of a Senate
subcommittee on antitrust, said he thinks the companies should
testify under oath about the contract. "If it hasn't done so
already, the Justice Department must investigate these
allegations," said Sen. Amy Klobuchar (D., Minn.), the panel's top
Democrat.
The Justice Department sued Google in October for allegedly
using anticompetitive tactics to preserve its search monopoly and
could add further allegations. Google says that suit lacks
merit.
Crucial to the backdrop of the Google-Facebook deal was the
advertising industry's movement toward an ad-sales method called
header bidding.
Header bidding helped website publishers circumvent Google's
exchanges for buying and selling ads across the web. The exchange
auctions ad space to the highest bidder during the split second it
takes a webpage to load.
Header bidding allowed the publishers to directly solicit bids
from multiple ad exchanges at once, leading to more favorable
prices for publishers. By 2016, about 70% of major publishers used
the tool, according to the states' lawsuit. Google worried a big
rival might embrace header bidding, such as the Facebook Audience
Network ad service, or FAN, cracking Google's profitable monopoly
over ad tools, the states allege. The Facebook service said it paid
publishers $1.5 billion in 2018, the last time it provided such
details on its financial payouts.
"Need to fight off the existential threat posed by header
bidding and FAN," Google advertising executive Chris LaSala wrote
in an internal document outlining 2017 priorities, according to the
draft complaint.
In March 2017, Facebook publicly endorsed header bidding. Google
approached Facebook and in September 2018 reached the digital
advertising agreement, the states allege. The draft lawsuit says
Google code-named it "Jedi Blue." In December 2018, Facebook
announced it was joining an advertising program, "Open Bidding,"
that Google offers as an alternative to header bidding.
In return, the states allege in the final suit, Google gave
Facebook special treatment. Among other things, it allowed Facebook
to send bids directly into Google's widely used software, known as
an ad server, the draft lawsuit says.
Typically, bidders go through an exchange, which sends the
winner on to Google's server. By circumventing the middleman,
Facebook could face less competition and save money. Google charged
Facebook 5% to 10% on each transaction compared with the standard
fee on Google's exchange of around 20%, and it barred Facebook from
discussing pricing terms publicly, according to the draft
lawsuit.
The Google spokeswoman declined to answer questions about
whether terms provided to Facebook were the same as those provided
to other auction participants.
"We don't manipulate the auction," she said.
Google added that at least 25 other companies participate in its
open bidding advertising program, and that Facebook participates in
similar auctions on rival platforms. "There's nothing exclusive
about [Facebook's] involvement, and they don't receive data that is
not similarly made available to other buyers," she said.
Wall Street Journal publisher News Corp, an outspoken Google
critic, was among the companies contacted by antitrust
investigators, along with New York Times Co., Gannett Co., Nexstar
Media Group Inc., Condé Nast and others, people familiar with the
matter said.
Google also told Facebook which ad opportunities were likely
produced by bots rather than by consumers, and it didn't charge
Facebook for those impressions, according to the draft suit. Other
auction participants asked Google for the same information but were
denied it, the final lawsuit says, redacting the information in
question.
Any bidder without that information would be at a disadvantage,
said Adam Heimlich, CEO of ad technology company Chalice Custom
Algorithms LLC. "It's like saying CarMax has the ability to tell
when they have a junky used car, and they don't tell you," he said.
Mr. Heimlich accused Google of harming competition at a Senate
hearing this year.
The Jedi Blue contract also appears to address the concerns of
Facebook and rivals that Google both runs ad auctions and
participates in them. The contract states Google won't use data
about Facebook's bidding history, known as bid response data, to
influence pricing, "reverse engineer" Facebook's strategies, or
"adjust or otherwise influence in real-time the bid response of
another bidder (including Google)," according to the draft
lawsuit.
Dan Rose, a Facebook vice president during the negotiations,
emailed CEO Mark Zuckerberg saying the company sought such
provisions "so that Google is no longer able to advantage their own
demand," creating "a level playing field," the draft lawsuit says.
The final version redacts the email and contract excerpts.
Unlike other types of antitrust cases, which can require complex
market analysis and the sussing out of business motivations,
agreements to fix prices or rig auctions are inherently illegal,
said Harry First, a New York University antitrust law professor who
was once the head of New York state's antitrust enforcement
bureau.
"The only defense that a court will hear is, 'We didn't do it,'
" he said.
--John D. McKinnon contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com and Jeff Horwitz at
Jeff.Horwitz@wsj.com
(END) Dow Jones Newswires
December 29, 2020 10:27 ET (15:27 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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