Why Google is downplaying its ad tech business but determined to keep it

Google Chief Executive Sundar Pichai met in Washington a few months ago with Sen. Mike Lee, a Utah Republican who backed legislation that would require the tech giant’s advertising technology business to be dissolved.

Mr Pichai’s anti-law message was one that has been a frequent refrain for the company amid concerns about its dominance in the industry: Ad technology is a small part of what Google does, he said, and not a significant part of the company’s revenue company, according to the people familiar with the meeting.

According to Google CEO Sundar Pichai, ad technology is just a small part of what the company does.


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Josh Edelson/Agence France-Presse/Getty Images

As Google faces years of regulatory scrutiny — from the European Union and the United Kingdom to the US Department of Justice and a Texas-led coalition of states — over whether it has abused its market power in advertising technology — the news that it has abused its market power in advertising technology Owns a small stake in the company, displayed earnings contrast with his determination to stay in business.

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says its “network” business — the parts that relate primarily to facilitating the buying and selling of ads on other sites — made in about $31.7 billion, or about 12% of its revenue, last year. Analysts say this is one of the least profitable areas of Google’s business.

But Google’s advertising tools also play a larger role in the company’s overall $209 billion advertising business. They funnel a large amount of money into Google-owned sites like YouTube and Search, and provide data about web users that helps those sites refine their offerings to advertisers, ad industry executives and analysts say.

“We have no plans to sell or exit this business,” a Google spokeswoman said in a statement.

The company has considered other changes. When Google was negotiating with the Justice Department this summer for a possible solution that would avoid litigation, it offered to put some of its ad tech assets in a separate division of parent company Alphabet, the Wall Street Journal previously reported. That was a far cry from the structural changes that ministry officials had sought.

In the European Union, the company offered to address a common complaint from competitors that YouTube ads can only be purchased through Google’s shopping tools. The company promised to develop tools that would allow competitors to broker YouTube purchases, the Journal reported.

Dan Taylor, Google’s vice president of global ads, said helping websites sell ads is key to Google’s mission of “making information universally accessible and useful.” He said the company also has a business interest in supporting ad-supported websites and apps.

“Without websites with searchable and findable content, people would have less of a need for search engines like ours,” he said in an interview. “That way, our interests are really aligned to support publishers through ads.”

Some explanations for why Google thinks its ad tech business is valuable:

Reason 1: It helps YouTube and search

The Google ad network earns fees by facilitating the buying and selling of ads that appear on third-party sites – sites it doesn’t own, such as Google. B. news, sports or lifestyle websites. The company’s core ad tech tools facilitate these transactions. Its AdMob product is used for mobile sites, while Google AdSense specializes in small sites and Google Ad Manager is generally for large online publishers. Google has said it pays out more than 69% to publishers using Google Ad Manager when placing ads through its buying tools.

But these ad tech tools may also choose to funnel the money advertisers pour in to Google’s own properties, where the company gets a higher share of revenue, on average, say industry leaders and analysts.

“It’ll pick itself all day,” said Dina Srinivasan, a lawyer and academic who published a paper in 2020 saying Google’s ad tech business had abused its monopoly. She previously worked as a consultant for News Corp,

the owner of the magazine.

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In her research, Ms Srinivasan found that the percentage of Google ad revenue going to Google’s own websites has steadily increased from around 50% in 2004 to 84% in 2019.

Competitors say Google’s appeal is partly because it’s a one-stop shop for digital ads. It can give advertisers access to thousands of sites across the web while giving them the ability to place ads on Google’s industry-leading properties.

Mr Taylor said Google’s shopping tools are designed to deliver the best return on investment for advertisers. “We’re not putting our fingers on the scales with that,” he said.

Reason 2: The data

Several advertising industry executives said Google’s third-party advertising technology business provides valuable data that paints a more complete picture of an online consumer’s journey.

Google can see when a user searched for a product — say, shoes — and then bought it. The third-party ad products enable the company to see that an ad on a sports website has brought the user to this path. This gives the advertiser a better idea of ​​the value of the ad.

“If you only have the search piece of this, you only have a small glimpse of a consumer’s journey,” said Andrew Casale, chief executive officer of Index Exchange, a rival ad-tech firm.

This understanding of customer behavior could be disrupted if Google had to divest or dissolve its third-party advertising business, advertising industry executives said.

“The breadth of data collection that Google can achieve by doing business with third parties is so valuable that they are fighting against it,” said Rajeev Goel, PubMatic’s chief executive officer,

a competing ad tech company.

Mr Taylor said that Google “broadly” doesn’t use data from its third-party ad business to improve its own properties, except for features like ad preferences, fraud protection and tools to help advertisers understand their return on investments.

Google’s advertiser help pages state that the user data for the ads shown on its own products is “based primarily on [users’] Activities on these products”, but the company does not rule out using data from their activities on other websites and apps.

Google has told advertisers that its ad technology plays a vital role in making the web thrive.


Photo:

David Paul Morris / Bloomberg News

Reason 3: Borg

Google and its ad tech peers agree that spinning off parts of the ad tech business would present significant logistical challenges.

After acquiring ad tech company DoubleClick in 2008 and other companies that followed, Google integrated them into corporate systems, including one that some employees refer to as “Borg.” (The Borg are a fictional alien civilization from “Star Trek” that operated with a hive mind and aimed to assimilate other civilizations and proclaimed that “resistance is futile.”)

“Logistically, it would be a nightmare for Google because Google has integrated all of these companies so tightly into their infrastructure — they all run on Borg,” said Tom Kershaw, a former Google ad technology executive.

“I don’t know how they can easily unravel it,” said Jeff Green, managing director of The Trade Desk,

another Google rival. “It’s all very important to them, and it’s all integrated.”

Reason 4: The web needs Google

Google has told advertisers that its ad technology plays a vital role in making the web thrive.

Google’s advertising tools allow virtually any website to make money by selling ads, say advertising professionals. Ensuring websites get this financial backing is an existential problem for Google because the more websites there are, the more users can search and the more valuable Google’s core business is, they say.

“Google’s nightmare scenario is that the only way to make money is to post everything on Facebook and monetize everything on Facebook,” said Ari Paparo, a former DoubleClick and Google employee.

Some executives at Google say that if the company pulled out of the ad tech business, there would be fewer high-quality ads on sites and more ad fraud — making it harder for sites to survive.

“They really believe that they are the good guys in ad tech and the rest of the ecosystem are bad guys who just want to make money,” Mr. Paparo said. “It’s sort of true. You can’t think of any other company that’s tried to make the open web better.”

Some ad tech executives say it’s a paternalistic attitude. “There was an open web before DoubleClick was owned by Google, and it grew like weeds,” Mr. Casale said. “The notion that it would cease to exist unless they defended it is ignorant.”

Write to Keach Hagey at [email protected], Sam Schechner at [email protected] and Miles Kruppa at [email protected]

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