Last month, Gary Gensler, chairman of the Securities and Exchange Commission, asked Congress to consider the idea of regulating cryptocurrency exchanges the way the federal government has long regulated stock exchanges. While his comments drew fresh attention to the unregulated markets for cryptocurrency, they reminded me of another long unregulated exchange marketplace: the market for digital advertising.
Each time you click on a website or an app, in the milliseconds it takes for it to load, the empty ad space on the page is auctioned off through specialized trading venues called ad exchanges. Alphabet Inc., which owns Google, operates the largest of these venues. It works “just like a stock exchange,” as Google explains, complete with brokers mediating transactions between sellers and buyers. Today, the billions of daily transactions on advertising exchanges owned by tech companies rival the number of trades happening on Wall Street.
To protect the public and promote fair competition in stock market transactions, Congress created the Securities and Exchange Commission and vested the agency with the power to issue rules and manage conflicts of interest between the exchanges, brokers and other industry players. For example, S.E.C. rules require companies that offer trading venues, or act as brokers on behalf of clients, to wall off those businesses. This prevents abuses of nonpublic information and helps curb market concentration. No similar authority polices online advertising, turning it into an opaque space rife with conflicts of interest.
After running an ad-technology company, I spent years helping lawmakers understand these digital markets. In my scholarly work, I have found that Google has been able to corner much of the ad market and keep trading costs high for websites, apps and advertisers. Now, I am a paid consultant for the team of lawyers in the Texas attorney general’s antitrust suit against Google focused on its ad-market practices. But given the grinding and unpredictable pace of litigation, I believe that we need a faster, more robust solution.
These problems took root more than a decade ago when Google made a bid for DoubleClick, the popular service that helps websites sell ad space. Federal regulators approved the purchase. But they did so without requiring that Google separate the DoubleClick division helping publishers sell on exchanges from the division helping advertisers buy ad space, or from the division operating an exchange, which Google later dubbed AdX.
Could Google operate an exchange while acting in the best interests of both the websites and advertisers — in other words, both the seller and the buyer — all at once? (You’d be rightfully worried if the lawyer defending you was also representing the party suing you, or if your real estate agent was also representing the seller.) As Representative Pramila Jayapal put it in a hearing on this situation last year, Google is “running the marketplace, it’s acting on the buy-side, and it’s acting on the sell-side at the same time, which is a major conflict of interest.”
Google today says that it has helped foster exchange competition. But shortly after consummating the DoubleClick acquisition, it steered websites’ ad space to its own exchange, AdX. Google did not let competing exchanges run by Yahoo, Microsoft and others bid on the ad space at the same time.
Unsurprisingly, such self-dealing allowed Google — a late entry to the exchange market — to quickly grow AdX into the largest trading venue for ads. Websites paid the price: The lack of exchange competition resulted in their ad space selling for up to 50 percent less than what it otherwise would.
An increasing share of advertising dollars is also winding up in the hands of Google properties. In 2007, about 35 percent of the ad revenue that Google made came from selling space on sites across the internet, sites which trust the company to be an honest broker. But the share going to Google sites has increased almost every year since. In 2020, Google booked about $146 billion in ad revenue; more than 84 percent of that amount went toward space on Google properties like search and YouTube. One possible result: Consumers see more ads on YouTube and more paywalls online.
The consequence of all this: Websites, apps and advertisers providing consumers with everything from news, games and consumer goods make less money selling ads and have to fork over more money to exchanges and other intermediaries. According to industry studies, ad intermediaries take 30 to 50 percent of every trade. In other words, when your local gym buys $1,000 worth of advertising on a local news site, the exchanges and other industry players can take $500 of that, leaving websites and apps with just half. Who pays the price? Again, the consumer, through things like more expensive gym memberships and news subscriptions.
So far, the burden of solving the problems of competition in advertising has fallen to antitrust law enforcers. This month, the competition authority in France announced a settlement in its antitrust case against Google in ad-exchange markets. Here at home, an antitrust bill introduced this year by Senator Amy Klobuchar may suggest a real interest in updating competition law for the digital era. But these proposals will do little to speed up the litigation process or ensure proper remedies.
Lawmakers could solve these problems by giving a federal agency like the Federal Trade Commission the power to police conflicts of interest and pass rules against self-dealing in emerging exchange markets like advertising. The approach aligns with recently released draft legislation in the House, which looks to force the biggest companies to divest assets or stop self-preferencing. After all, Congress did this for the stock market, and it may do so with cryptocurrency.
Fixing the digital-ad marketplace is a rare issue with bipartisan support. Now is the time to make this regulation happen.
Dina Srinivasan is an antitrust scholar and fellow with the Thurman Arnold Project at Yale University. She is consulting with the Texas attorney general’s office on its case against Google.
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