The Department of Justice V Google Ads: Part 1

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3:38Hello and welcome to Better Offline. I'm your host, Ed Zitron.

3:50Better Offline. And today I'm joined by Jason Kint, the CEO at the Trade Association DCN. Jason, thank you for joining me. I'm pleased to be here. Thanks for having me. So Jason is joining us today and will be joining us more regularly to talk through the massive antitrust trial going on with Google, the second of them. Jason, why don't you set the scene of what's going on? Yeah, sure. Thanks, Ed. Yeah, we just wrapped up getting the opinion on the first trial which was the search trial where judge meta decided and issued a opinion that google has a monopoly in search and a monopoly in search x ad text ads so this is trial number two it's going to be starting on monday the 9th in the eastern district of virginia and this one is focused on the ad tech part of google's business and everything related to it so how does that how is that different?

4:46Because a lot of people see them kind of as one homogenous entity. Sure. Yeah. I mean, the advertising, for people to understand, the advertising business for digital has now become almost entirely a live kind of auction marketplace, where if you think of all these ad units across the web, they are being bought and sold in near real time to the highest bidder. And Google as a company has both the software and a lot of the data that powers the decision making. And so if you think about kind of on the buy side, a bunch of companies bidding on advertising units that they want to own to get in front of consumers.

5:25And on the other end, you've got the owners of those units, whether it be publishers or Google itself. Google is the largest player on both sides of those transactions. And they also run most of the auctions too. So what is happening in this trial? So the Department of Justice started investigating Google back in 2018, and they spent a few years doing it. The state attorneys general, led by Texas, filed a lawsuit back at the end of 2020 saying that Google's ad tech business violated antitrust laws. And since then, the Department of Justice filed its own lawsuit back in January of 2023, so just 18 months ago.

6:10And they did it in Virginia where it's kind of known as the the nickname is the Rocket Docket because it moves so fast. And so in less than 18 months, this one's gone to it's gotten to the point where now we're about to have a trial starting on Monday and they'll present their arguments to take about four weeks and the look the judge there, the district judge will determine and issue her opinion on whether or not the various charges that are in the complaint, she agrees with them and whether or not there'll be remedies for it. And what are the charges, roughly speaking? The judge, Judge Brenkema, what are the charges?

6:50Yes. That Google has a monopoly in, I believe, three different areas of the advertising supply chain. And so that's the software that publishers use. That's the software that runs the auctions. And that's the software on the buy side that's being used to bid on the ads. And in those areas that they've also abused that monopoly power. How have they been abusing it? Let's get into it. Get into it. Well, you know, let's see how they're abusing it. I think one thing that's helpful, and fortunately and maybe unfortunately for Google, their own employees and some of the discovery for the lawsuit did a comparison to the stock market.

7:36When you think about this kind of live marketplace, anybody that saw Flash Boys or read the book on high-speed trading, this is that, but it's maybe even more intense. Do you explain a little bit about what that means for those who might not have? Sure. That means that if you think about these advertising units that sit there across the web, that there is incredibly high speed trading of those units that are happening in milliseconds. Meaning that, you know, in a blink of the eye, there are parties that are both bidding on and delivering on ad units based on a whole range of targeting requirements and pricing.

8:17And then there's rules around those auctions. And so if you think about kind of the way a stock market works, which is also what happens in real time, people are buying and selling stock using machine, entirely using machines that have been programmed to handle the bidding and the marketplace. Google is doing that for the entire supply chain, both the buy side and the sell side. And so the comparison that the Google employee made and also the assistant attorney general did when they announced the lawsuit was to the stock market, as if Google was leading and owned a majority of the software both for buying and for selling and for running the actual auctions themselves.

9:02And so what's happened so far? So you're quite close. You're about 20 minutes from the courthouse, roughly? Yeah, maybe about 20 minutes from the courthouse. There's been a number of what they call pretrial motions for a variety of things to kind of figure out the rules of the road for the trial when it starts Monday. Some of that's just logistics. Some of that's really important in terms of like what evidence will be allowed and not allowed, who will testify and not testify, etc. So what have you actually witnessed so far? Like what you've been in a few of these pretrial motions even? Yeah. Yeah.

9:35Well, that's one thing I start with the judge, because this actually a little bit in the weeds here. But this lawsuit originally started out. It was going to go before a jury of Americans to make the decision. So you think about the Justice Department having to explain this topic to the average American that that changed a few months ago based on a legal maneuver that Google did. And so now the judge is going to be actually the one that will issue the verdict and make the decision. And, you know, my observation is she is incredibly experienced. She's been a judge for quite some time and she's had some very, very significant cases over her career, involving from Al Qaeda terrorists on down to 9-11 related cases.

10:30So she's not intimidated at all by anybody in the room, including Google, for sure. And so in that regard, you know, I'm very optimistic. She seems to only care about the law and justice, which is what you want to see from a judge. You know, Google, like with the search trial, has the best and the brightest attorneys that are out there. You know, three or four firms working for them and they've got half the room full of their people. This is really, really important to them. The Justice Department wants to break up. I mean, the outcome they want is they want to break up Google. And so that's what this trial is all about.

11:04How do you think, how do you see their chances? You know, if you asked me, and I'm sure I was on the record about this back a year ago, I would have said that the chances for this one were higher than the search, the search lawsuit that they just won. And so I also felt pretty optimistic about the search lawsuits once they finished closing arguments, because I thought they did a really good job explaining their case. This one, I think it's even more obvious going in. I mean, to put real numbers around it, Ed, I mean, the Justice Department's analysis and their experts' analysis is that Google has over 90 % of the software that publishers use to serve the ads.

11:47And then they've got 98 % of the mobile queries. We learned that from the last decision. And so on the buy side, they've got, you know, almost, you know, 98 % of the advertising demand that's coming through from search ads. So like on both sides of the market, they've, you know, and then they get to write the rules. So it's a problem. And as far as the original allegations go, can you kind of break those down at all and explain what the specific things that you would consider the most important parts of this trial are? Yeah, sure. You know, that one that they took the market power that they had on the advertising demand side and that they use that in order to create market power dominance, if you will, in other parts of the supply chain.

12:43And so one that I think is really important is that we now have a decision from the other court on that dominance on the demand side. And so Judge Mehta already did the work of saying, you know, he believes that Google, you know, they proved the case, Justice Breyer proved their case that Google has a monopoly in search and in search text ads and that they abused that. And so that decision is no longer just allegations as it relates to Google. and this case claims that they use that market power to create dominance elsewhere. And so they walk in, I think, in a much better place based on the prior opinion that came out in August.

13:28Second thing I'll hit on is that they tied that to other parts of the business, so the exchange in the ad server business in order to, so basically to force people to use the other products. So as an example, you know, the argument or the allegation is that you weren't able to get access to any of that demand unless you use Google's AddX product. Right. And so, you know, the evidence looks pretty clear on that, but they're going to have to present that case. And I think a third area that I hit on is that that the market itself is properly defined. That's always important for antitrust trials in cases.

14:09And so this case is all about something called open web display advertising. And Google will try to blur that line. But I think that's also... What is open web display advertising? Well, I guess it's easier to explain why it's not. And that's what bothers Google is, you know, it's not closed platform. So it's not advertising on TikTok or not advertising on Facebook. it's advertising that's available over the web browser in which companies can participate in auctions on the buy side or they can participate auctions on the sell side and you know and these are auctions that are happening for display advertising units on websites and perhaps it's a it's a good time to actually take a step back and ask how does google make money from advertising What are their advertising units?

14:59Because you've mentioned there's the bidding process, but where do we see Google advertising? Well, they, you know, a majority of the advertising, and it's become more and more over each year, is actually on Google's own properties. So interesting enough, that's where they make the most money because they don't have to share it with anybody else, right? And so you've got the ads on search, you've got the ads on Gmail, you've got the ads on YouTube. So it's on what they call their owned and operated properties. And then also Google serves ads across the rest of the web. And that's where they get a lot of scale and a lot of data.

15:36And then they take a percentage of the action on the buy side, percentage of the action on the sell side, percentage of the action in the auctions. And that all adds up so that they're taking allegedly 30 to 32 % of the revenue for just the technology that's being used in order to serve those ads. Does the suit suggest, does it give any idea of what the balance, you said that most of their advertising goes through their own properties. Does it balance that out at all? Does it explain? Yeah, I think it's in there and it's certainly in their SEC filings. I think this gets to kind of one of the arguments I think you'll hear Google make and certainly their proxies and kind of their advocates are making is that the part of their revenue that serves on other people's properties on publisher sites is only about 15 you know say 15 or so of their revenue and it's declining the last couple years so it's not growing it's flat to declining it's not that material that's their off property revenue that's their off property revenue that's very bad for them but the common sense piece well yeah but that's where they also have the lower margin because they don't have they have to share it with people um the common sense piece is that well one if that wasn't that important to them then they'd be offloading it right because why would you want to go get sued by the united states justice department and potentially broken up um if it's not that important to you um and then two that ignores that's just the revenue piece but I think it's important to understand, Ed, that like, and this will come out, I think, in a lot of the documents, that the data that they get from those auctions and from serving ads across the web and from tracking users across the web.

17:28I mean, there's this important moment in time that will come up in the trial, I believe, where in 2016, Google merged all of the ad tech data they have with all the search data they have, with all the location data they have, with all the Android data, and all the Chrome browsing data into one single profile, which they promised they wouldn't do, and they went ahead and did it. And if you think about the value of that data that underpins it, that's really important. So when you say it unites those profiles, is it that they have a profile on you and me? Or do we just not know? I mean, we expect that they, whether it's a synonymous indicator or a placeholder for that user, but they know enough that it's this device which is attached to a person, and I know all this other information about them.

18:20Yeah, this person may resemble that. Because I see that in 2016, they dropped a ban on PII in personally identifying information. But is this separate to that? Is it the combination of everything else? I mean, that's what the reporting was in 2016. And that's what the evidence that's starting to bubble up was. They call it Project Narnia is what we just learned. But they merged. They dropped their ban on PII being merged with search. which Julia Angwin from Publica, I think, did the report. And so that was removing the guardrails, basically, at least in my mind. And I think that will be a part of the evidence.

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22:59Well, actually, let me take that back. I'm sure there's surprising stuff, but what happens now? So we're pushing this episode out on September 9th, the day of the first trial. So what happens then and what happens after that? Yeah, so the first couple of weeks, the desk department will present what they call their case in chief. It's their evidence. So they're going to have a slew of witnesses that have already been identified, both Google employees, ex-Google employees, CEOs and top founders of a lot of the competitive ad tech companies, experts, et cetera, that probably have already been deposed and will now answer questions on the witness stand.

23:40And they'll have a ton of exhibits that we've probably seen less than 5 % of them, I'd say, at this point to prove their case. And Google will have a chance to ask questions to throughout, and then they'll present their defense. I expect it'll take about four weeks total. I think important things for people to know going into the trial, you know, I already covered that. I think the judge is perfect for a case like this. So that's very optimistic at this point. Also, I would say it's very important to know that there was an important hearing last week in which it's happened with multiple lawsuits against Google where Google got in trouble for not preserving documents.

24:26I was going to say, yeah. Yeah. And so Google, at a point a number of years ago, issued a memo from their chief legal officer and changed their system so that any chat messages would, by default, delete after 24 hours is the way it's been alleged. And unless the employee actually proactively turned on their history and turned off that purging because they were under a litigation hold, then the evidence was lost. And so the judge very much expressed her concern about this had happened and that probably a lot of evidence had been deleted and that throughout the trial, she's going to have to take that into account whenever Google sends somebody up to the stand, that she's going to have to have her own inferences on whether or not this is a reliable testimony and whether or not there's, you know, information and exhibits that were not available to her because of this policy.

25:25That's like really bad for Google going into a trial, you know, like they're already. What are the consequences there? Well, I think that, you know, ultimately she could decide to infer that what they call adverse inferences. She could basically decide that that there has been evidence that's been purged in her mind and therefore um therefore google was trying to hide stuff that would have been incriminating to them or prove the case of this department so doesn't that weaken the case potentially on like uh appeal if she does that a lot or would it be very carefully used it would probably be carefully used i think you know interesting enough judge meta had the same uh concern and decision uh you know coming out of the search opinion but he said that he didn't need it.

26:12You know, he didn't actually need to rely on it, that he was going to find against Google that it was a monopoly and abused its power without it. So he didn't need to have that intent. She says the intent's really important to a case like this. So we'll see how heavily she weighs on it at the end of the day. So on the 9th, the Department of Justice will begin making their case. They will. They will. Yep. So has anything interesting come out yet as far as the initial motion? And have we seen any of the exhibits provided in advance? Sure. Yeah, we've seen, I mean, even the original complaint we've seen and through reporting, we've seen some of the evidence and details on a lot of projects that Google had.

27:00There's a lot of code name projects, which will make it hard to keep up with. But there's things like Perot and Bernanke and all these fancy names, Bell, and they each have a little clever story behind them, Jedi, Jedi Blue. And behind those fancy code names are typically experiments, they would call it, where Google is testing making changes to its auctions in order to drive some sort of outcome, whether it be more revenue for Google, whether it be more market power, more business for Google. driving more revenue to the publishers or the advertisers. It's them playing with the auctions. And so we've seen some of the details of those.

27:42I think what we're going to see now is some of the intent behind them and some of the communications internally about them. I'd be interested. So Jedi Blue, that was the collusion with Facebook, right? That was the alleged collusion with Facebook. It's very much still around. Well, I thought that that got kind of dismissed in Europe. Yeah, so Google has made that communication argument through some of their proxies. It actually was dismissed in the state AGs have their own case that I mentioned was filed at the end of 2020 in the Eastern District of Texas, which was then moved to New York, Southern District of New York.

28:20And while it was there, that was dismissed from the case. I won't go into why or whether that was accurate. But that specific charge, which had potential criminal implications for them, was dismissed. The complaint and the lawsuit then moved back to Texas for a different reason. And that discovery was reopened up about four months ago, I'd say, on Facebook. And it also led to a deposition of Sundar Pakai, the CEO of Google, because he has unique knowledge about that deal. And what was the deal? The deal, as alleged, was that Project Jedi, as we understand it, was Google's attempt to match or have their version of what's called header bidding, which was this coding layer at the top of a web page that opened up auctions so that other parties could compete and participate in live auctions.