Day 5: The rents are irrationally high

The Monopoly Report is going daily during the trial. Our intrepid founder is in a windowless room without a phone or laptop to get you the good stuff.

Day 5: The rents are irrationally high

Or so thinks Chris Lasala, former head of publisher commercialization at Google, who wrote in an email that “We extract irrationally high rent from AdX” referring to AdX’s persistent, and unwavering 20% take rate. Lasala was in the middle of a robust internal debate at Google about how to evolve the strategy around pricing, header bidding, and more.

Here’s what happened.

Stuff we learned

• You can use prebid as an ad server, but you can also walk to China.

• How Google calculates take rates is beyond the comprehension of people who worked on pricing at the company.

• Marty Swant is not Brian Boland.

Plaintiff’s witness 12: Tom Kershaw, formerly Magnite (continued from Day 4)

If there was a popularity contest among the witnesses thus far Tom would be the odds on favorite. Tom founded prebid.js and served as the board chairman for prebid.org, and he testified with clarity and a little attitude.

Tom’s testimony yesterday clearly explained header bidding and the evolution away from the waterfall. Today under cross-examination he put to rest some of Google’s counter-assertions.

Google has tried several times to make the case that prebid is a potential replacement for ad serving and competitive with DFP. This has caused confusion among some witnesses with not very compelling answers. Google also brought up this article on the prebid website which explains an implementation that doesn’t rely upon an ad server. Tom made it very clear this was not a real or realistic example, eventually saying “In theory I could walk to China, but I’m not going to do that.”

The second line of questioning asked Tom if publishers use prebid to get a bid, then choose, voluntarily, to allow AdX to bid within DFP. This is a very tortured way of putting the question, as customers would certainly have chosen to have a unified auction with AdX included if they could, and they also shouldn’t be logically compelled to opt out of AdX entirely because of the two-tier, last look auction. Tom responded: “I have the option to starve to death but I don’t choose to.”

Tom also testified that “pretty much everyone” uses prebid on the publisher and exchange side, except Google. And that he asked Google to join multiple times.

Plaintiff’s witness 13: Chris Lasala, formerly Google’s head of commercialization for publisher tools

The bulk of the day was spent with Chris with a focus on the ties between DFP and AdX and how they reinforce the alleged monopoly. Since Chris was involved in pricing and go-to-market, there were a lot of emails.

AdX doesn’t discount

We’ve heard previously about the 20% take rate enjoyed by AdX. Pricing power is a key element of many antitrust cases so the DOJ wanted to use Chris to bolster the point that AdX didn’t need to discount the 20% to gain or maintain business.

First up was an internal Google deck showing discounting levels by types of auctions in AdX. Of 3,815 publishers conducting open auctions on AdX, only 13 had rate card discounts (99.92% paying rate card) and the weighted average take rate across all publishers was 19.89%.

There were slightly more discounts for other types of auctions, and we learned the take rates by type of auction. The slide only had abbreviations so I’m guessing what’s in the parentheses.

There were a bunch of emails about pricing power which I’ll summarize and paraphrase below (Lasala isn’t the author in all cases):

• “OA discounts are a last resort, we are holding firm on this position.” [bold in original]

• “The AdX 20% holds today not because there is 20% value, but because of unique demand via AdWords”

• “I think we are all in agreement that ‘Exchange Functionality’ is not worth 20%”

• “We extract irrationally high rent from AdX”

Google Ads take rates

There was a moment in Lasala’s testimony where an email said something that confused everyone in the court. As a reminder, AWBid is the program whereby Google Ads bids into third-party exchanges, and testimony to date has highlighted how small a part of bidding this is for those exchanges. Referring to the “narrative” that Google Ads demand is only available in the AdX-DFP combination, Lasala wrote:

This caused a bunch of questions from the judge and the answers Chris gave left everyone in the courtroom confused. The matter didn’t get resolved in court, and several participants button-holed me in the hallway to figure out what it all meant. This is actually a really important issue and I think the DOJ is missing the meaning.

My understanding, which may be flawed, is that Google Ads always takes 32% no matter which channel it bids through, though this fee is shared when bidding into AdX. If you imagine the time before AdX when all of Google Ads demand went into AdSense, there wasn’t a sense of which “side” was paying, it was just 32% from the middle. But with AdX, there is a desire from Google to tell publishers they are always being charged a flat 20%, no matter who the buyer is. This is easy to understand when the buyer is a DSP, but when the buyer is Google Ads (which wants 32%), you need to do a little creative accounting to make this work. Effectively Google Ads takes only 12% when bidding into AdX to keep the total 32%. This comports with a Google blog post on the subject.

I whipped up the below diagram to explain this.

There are two very important implications of this:

1. First, it means that if any document talks about the profitability or revenue of AdX, that number is significantly overstated. If as a remedy, AdX were to be spun out, and Ads got to bid wherever it chose, Ads would likely wish to keep the whole 32% and AdX’s take would drop dramatically.

2. Second, and more importantly in the short term, it means that even if AWBid expanded the scope of its bidding beyond just retargeting, it would still be bidding significantly lower on third-party exchanges than it does on AdX. If you consult the diagram above, you’ll see that bids are only reduced by 12% before the AdX auction, but are reduced by 32% before the third-party auction.

Internal debates

There were a lot of internal debates at Google about a lot of the topics in this case. Building on the take rate discussion there were several discussions about bringing AdX takes down to 10%. Jonathan Bellack, who led DFP, suggested this several times.

The commercial teams also seemed conflicted. With the emergence of header bidding some folks like Chris called it an existential threat that should be fought off, while others acknowledged that it was a sign that publishers wanted a unified auction. Michelle Dauwalter, a senior customer facing employee, wrote “we should all for all sources of demand to compete fairly, in real-time.”

Emerging competition

Lasala’s job included keeping on top of competitive threats and communicating to the teams. Supporting Google’s market definitions argument (where they consider the display market to include social) on cross-examination they brought into evidence documents describing the threat from Facebook and Google.

And Amazon:

Plaintiff’s witness 14: Luke Lambert, OMD US

Luke is a senior executive from a big ad agency. He gave very anodyne testimony about how he optimizes channels of media. On cross, Google showed him documents where he told clients that they should budget for “display” and that term included some in-app and native. Gotcha!

Plaintiff’s witness 15 & 16: Brian Boland of Facebook and Arnaud Créput of Equativ

Your humble reporter had to catch an Amtrak to see his family so you’ll have to wait until I read the transcripts to hear what this guys said.

Arnaud’s testimony was read in by transcript and I think we can make a strong guess he said basically the same things we’ve been hearing from everyone — its very hard to compete with DFP because of the AdX demand.

Brian’s testimony, on the other hand, has the potential to be really interesting, because we’re not sure the extent to which the DOJ will be pushing the “Jedi Blue” narrative — that Facebook and Google colluded to kill header bidding.

What’s next?

Next week we’re kicking off strong with YouTube CEO, Neal Mohan. I also expect to hear from Jonathan Bellack and Brian O’Kelley.