Category: competition

Competition and antitrust

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Revisiting Search Bias at Google

Last week Joshua Wright posted a critique of my January 2011 Measuring Bias in ‘Organic’ Web Search (with Ben Lockwood). Some quick thoughts –

First, there’s some important common ground here: Wright and I both find that Google shows many of its own results, and does so in prominent positions.

Now, Wright says Bing presents its own results slightly often more than Google does so. In contrast, important portions of my analysis indicated that own-service links are particularly prominent at Google. Why the gap between my analysis and Wright’s? One key challenge is the lack of a natural basis of comparison. Suppose Google controlled 50% market share while five competitors held 10% each. Then we could compare Google’s results to a possible consensus among the others — better revealing whether and when Google favors its own services. But in fact the runners-up are much smaller: after Bing+Yahoo, we reach smaller firms like Blekko, each with market share far below 1%. Without a competitive marketplace providing a baseline, comparisons between search engines are necessarily difficult. So it’s no surprise that the numbers come out differently depending on the approach.

Wright criticizes my decision to examine brief, popular searches rather than a selection of actual user searches. But searches are messy and idiosyncratic: Each day at Google, 20% to 25% of searches are completely new, never before seen. Wright favor analysis of searches seen in AOL logs, but this method tends to emphasize unusual searches like “dog who urinate on everything” and “you’re pregnant he doesn’t want the baby” (the first two examples in Paul Boutin’s 2006 examination of AOL logs). In contrast, I chose to focus on short, simple searches where biased results have a particularly broad effect.

Wright argues that if Bing presents its own results as often as Google does, then own-service links must be pro-competitive, raising no antitrust concern. I disagree. The same behavior can have very different consequences when performed by a dominant firm versus a smaller competitor. Indeed, section 2 of the Sherman Act only applies to companies with market power. Meanwhile, companies without market power may engage in the exact conduct that Section 2 prohibits. For example, Microsoft faced antitrust litigation when it included Internet Explorer in Windows, even as Apple permissibly included its Safari browser in MacOS.

Wright suggests that antitrust investigation of Google is stillborn for lack of consumer harm. I see two problems with this argument. First, competitive foreclosure is a sufficient cause for concern. Certainly Google’s own-service links can stymie competition: It’s a tall order to start the next Yelp if Google may adjust its algorithm to always put Google Places first. From 2006 through June 2011, ads from Google Checkout merchants featured a special logo — a benefit unavailable to merchants using competing checkout systems (like PayPal). Even the perception of such favoritism can disrupt competition: In June 2011 a Google Offers salesperson told a merchant that signing up with Offers would provide “SEO benefits” to make the merchant “number one in Google.” Google quickly disavowed that statement, but on Wright’s theory, this tactic would be entirely permissible. Imagine the harm to Groupon, LivingSocial, and fellow travelers if Google gave Offers advertisers the favored map placement that AdWords advertisers already enjoy. In my view, that’s the wrong result. New providers necessarily rely on Google to reach users, but their business plans won’t work if Google can systematically favor its own services at competitors’ expense.

Second, when Wright says there’s no consumer harm, he has the wrong consumers in mind. The folks paying the bills for Google are advertisers — and advertisers pay a high price that has only grown as Google gains market share.

Ultimately, Google’s antitrust problems go far beyond algorithmic search preference. Google’s harsh treatment of advertisers smacks of market power; an advertiser with a real choice of ad networks would not accept Google’s high prices and one-sided terms. Google’s dealings with mobile handset makers similarly draw on Google’s dominance: If there were numerous popular third-party operating systems for mobile handsets, Google wouldn’t be able to compel manufacturers into dropping third-party software like Skyhook; and if there were numerous strong vendors for search, maps, videos, and other core mobile apps, Google wouldn’t be able to bundle its mobile apps to compel handset manufacturers to take all of these as a condition of preinstalling any of them. At every turn, we see Google leveraging its dominance in certain sectors to shore up its position in others – and that’s a n approach that rightly raises significant antitrust concern.

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Advertisers’ Missing Perspective in the Google Antitrust Hearing

This week Google ex-CEO Eric Schmidt will testify at a Senate Antitrust Subcommittee hearing that investigates persistent allegations of Google abusing its market power. Other witnesses include Jeff Katz, CEO of Nextag, and Jeremy Stoppelman, CEO of Yelp — ably representing the publishers whose sites are pushed lower in search listings as Google gives its own services preferred placement. But who will speak for advertisers’ interests?

Each year Google bills advertisers some $30+ billion; advertisers quite literally pay the bill for Google’s market dominance. Yet advertisers seeking search traffic have little alternative to the prices and terms Google demands. Consider some of Google’s particularly onerous terms:

  • All-or-nothing placements. An advertiser wishing to appear in the Google Search Network must accept placement on the entirety of Search Network, in whatever proportion Google elects to provide. Some Google Search Network properties are excellent, like AOL and New York Times. Others are dubious, like typosquatting sites, adware, and pop-up ads. A competitive marketplace would push Google to offer advertisers a meaningful choice of advertising venues, and advertisers could choose which placements they want. Instead, Google bundles placements in a way that compels advertisers to buy worthless traffic they don’t want yet can’t avoid.
  • Low-quality search partners. Far from a good-faith effort to rid its network of low-quality partners, Google has retained placements through InfoSpace, a traffic syndicator whose undesirable traffic sources are well-known, amply documented (1, 2, 3), and ongoing. In a competitive marketplace, Google would have to offer advertisers high-quality, trustworthy traffic. But in current conditions, Google knows advertisers will accept Google’s traffic even if Google mixes in low-quality traffic advertisers do not want.
  • Opaque ranking and pricing. Google selects, orders, and prices advertisements using algorithms that only Google knows. As a result, advertisers struggle to understand why their ads appear in unfavorable positions or not at all: Is a competitor bidding more? Has Google assessed a competitor’s ads more favorably? (If so, is such assessment accurate or a system malfunction?) Or has Google quietly penalized an advertiser for taking actions adverse to Google, perhaps speaking to a journalist or complaining to a regulator?

    Google tells advertisers nothing about others’ bids, and Google provides only ambiguous information about its assessments of advertisers’ ads. So advertisers are left to wonder “have I been penalized?” without rigorous methods to answer that question. Advertisers would flock to a viable alternative search engine that treated them fairly and predictably while offering high-volume search traffic. But Google’s market power makes any such switch unrealistic.

  • Harsh contract terms. Google’s US Advertising Program Terms purport to let Google place ads “on any content or property provided by Google … or … provided by a third party upon which Google places ads” (clause 2.(y)-(z)) — a circular “definition” that sounds more like a Dr. Seuss tale than a formal contract. If Google does provide information about the sites where it places ads, Google disavows the accuracy of that information (no warranty or guarantee as to “reach, size of audience, demographics , or other purported characteristics of audience” (clause 5.(vi))). Google also “disclaims all warranties [and] guarantees regarding positioning, levels [or] quality … of costs per click, click through rates, … conversions or other results for any ads” (clause 5.(i)-(v)). Furthermore, even if an advertiser proves a violation, Google claims that “any refunds for suspected invalid impressions or clicks are within Google’s sole discretion” (clause 5).

    Even Google’s notification provisions are one-sided: An advertiser with a complaint to Google must sent it by “first class mail or air mail or overnight courier” with a copy by “confirmed facsimile.” (Despite my best efforts, I still don’t know how a “confirmed” facsimile differs from a regular fax.) Meanwhile, Google may send messages to an advertiser merely by “sending an email to the email address specified in [the advertiser’s] account” (clause 9).

    These terms smack of market power: Rare is the advertiser who would accept such terms if reasonable choices were available.

  • Banning tools to help advertisers move elsewhere. Savvy advertisers seek to buy placements through Google as well as competing search engines such as Yahoo and Bing. But Google builds roadblocks to hinder advertisers’ efforts. Certainly any advertiser wanting to run a large campaign on multiple search engines needs tools to help — to make the first copy from Google to competitors, and to perform ongoing sync’s and updates. But Google’s AdWords API brazenly prohibits tool-makers from offering these services — leaving advertisers either to do the work manually (unreasonably slow and costly) or to write their own tools by hand (infeasible for all but the largest advertisers).

    Google has never offered any pro-competitive or competitively-neutral explanation for restricting how advertisers copy their own ad campaigns. In a rare moment of frankness, one Google executive once told me “we don’t have to make it easy” for advertisers to use competitors’ services. That argument might have passed muster a decade ago, but Google’s dominance puts such tactics in a new light.

Google likes to argue that “competition is one click away.” First, I question whether users can actually leave as easily as Google suggests: Popular web browsers Firefox and Chrome strongly favor Google, as Google CFO Patrick Pichette recently admitted (“everybody that uses Chrome is a guaranteed locked-in user for us”). In the mobile context, Android offers Google similar lock-in. And even on non-Google mobile platforms, Google serves fully 95% of searches thanks to defaults that systematically direct users to Google. Meanwhile, syndication contracts assure Google exclusive long-term placement on most top web sites. Against this backdrop, users are bound to flow to Google. Then advertisers must go where the users are. Whatever choice users have, advertisers end up with much less.

In the last ten years, Google grew from 12% to well over 80% worldwide. In that time, Google moved from zero ads to a dozen or more per page; from placing ads only on its own site to requiring advertisers to purchase ads with thousands of partners of dubious or unknown quality; from hustling to convince advertisers to buy its novel offering, to compelling advertisers to accept the industry’s most opaque pricing and most onerous terms. At the start of a new decade, Google is stronger than ever, enjoying unrivaled ability to make advertisers do as Google’s specifies. It’s time for advertisers — and the regulators who protect them — to put a check on Google’s exploitation of its market power.

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Remedies for Search Bias

Disclosure: I serve as a consultant to various companies that compete with Google. But I write on my own — not at the suggestion or request of any client, without approval or payment from any client.

In a forthcoming paper (update, November 2011: paper is available), I’ll survey the problem of search bias — search engines granting preferred placement and/or terms to their own links or to others’ links chosen for improper purposes. What purposes are improper? Given others’ work in that area, I’ll defer my thoughts on that subject to the paper. Today I’d like to focus on remedies — what tactics a dominant search engine ought not employ due to their detrimental effects on competition, and how prohibiting those tactics would help assure fair competition in search and related businesses.

The prospect of legal or regulatory oversight of search results has attracted skepticism. A search industry news site recently questioned the wisdom of investigating search bias by arguing that, even if bias were uncovered, “it’s not clear what any remedy would be.” James Grimmelmann last month critiqued the suggestion that search engines can be biased, and he argued that even if such bias exists, the legal system cannot usefully prevent it. Discomfort with the prospect of legal intervention extends even to those who ultimately see a need for oversight: For example, Pasquale and Bracha title a recent paper Federal Search Commission?, ending the title with a question mark to credit the immediate shortfalls of an overly bureaucratic approach. Meanwhile, Google’s caricature of regulation warns of government-mandated homogeneous results and unblockable web spam, offering a particularly pronounced view of search regulation as intrusive and undesirable.

I envision an alternative approach for policy intervention in this area — addressing the improprieties that various sites have alleged and stopping specific practices that ought not continue, while avoiding unnecessary restrictions on search engines’ activities.

Experience from Airline Reservation Systems: Avoiding Improper Ranking Factors

A first insight comes from recognizing that regulators have already — successfully! — addressed the problem of bias in information services. One key area of intervention was customer reservation systems (CRS’s), the computer networks that let travel agents see flight availability and pricing for various major airlines. Three decades ago, when CRS’s were largely owned by the various airlines, some airlines favored their own flights. For example, when a travel agent searched for flights through Apollo, a CRS then owned by United Airlines, United flights would come up first — even if other carriers offered lower prices or nonstop service. The Department of Justice intervened, culminating in rules prohibiting any CRS owned by an airline from ordering listings “us[ing] any factors directly or indirectly relating to carrier identity” (14 CFR 255.4). Certainly one could argue that these rules were an undue intrusion: A travel agent was always free to find a different CRS, and further additional searches could have uncovered alternative flights. Yet most travel agents hesitated to switch CRS’s, and extra searches would be both time-consuming and error-prone. Prohibiting biased listings was the better approach.

The same principle applies in the context of web search. On this theory, Google ought not rank results by any metric that distinctively favors Google. I credit that web search considers myriad web sites — far more than the number of airlines, flights, or fares. And I credit that web search considers more attributes of each web page — not just airfare price, transit time, and number of stops. But these differences only grant a search engine more room to innovate. These differences don’t change the underlying reasoning, so compelling in the CRS context, that a system provider must not design its rules to systematically put itself first.

I credit that some metrics might incidentally favor Google even as they are, on their face, neutral. But periodic oversight by a special master (or similar arbiter) could accept allegations of such metrics; both in the US and in Europe, a similar approach oversaw disputes as to what documentation Microsoft made available to those wishing to interoperate with Microsoft software.

Evaluating Manual Ranking Adjustments through Compulsory Disclosures

An alternative approach to avoiding improper ranking factors would require disclosure of all manual adjustments to search results. Whenever Google adjusts individual results, rather than selecting results through algorithmic rules of general applicability, the fact of that adjustment would be reported to a special master or similar authority, along with the affected site, duration, reason, and specific person authorizing the change. The special master would review these notifications and, where warranted, seek further information from relevant staff as well as from affected sites.

Why the concern at ad hoc ranking adjustments? Manual modifications are a particularly clear area for abuse — a natural way for Google to penalize a competitor or critic. Discourage such penalties by increasing their complexity and difficulty for Google, and Google’s use of such penalties would decrease.

I credit that Google would respond to the proposed disclosure requirement by reducing the frequency of manual adjustments. But that’s exactly the point: Results that do not flow from an algorithmic rule of general applicability are, by hypothesis, ad hoc. Where Google elects to use such methods, its market power demands outside review.

Grimmelmann argues that these ad hoc result adjustments are a “distraction.” But if Google’s manual adjustments ultimately prove to be nothing more than penalties to spammers, then regulators will naturally turn their attention elsewhere. Meanwhile, by forcing Google to impose penalties through general algorithms rather than quick manual adjustments, Google will face increased burdens in establishing such penalties — more code required and, crucially, greater likelihood of an email or meeting agenda revealing Google’s genuine intent.

Experience from Browser Choice: Swapping “Integrated” Components

Many complaints about search bias arise when longstanding innovative services are, or appear to be at risk of becoming, subsumed into Google’s own offerings. No ordinary algorithmic link to Mapquest can compete with an oversized multicolor miniature Google Maps display appearing inline within search results. (And, as Consumer Watchdog documented, Mapquest’s traffic dropped sharply when Google deployed inline maps.)

On one hand it is troubling to see established firms disappear in the face of a seemingly-insurmountable Google advantage. The concern is all the greater when Google’s advantage comes not from intrinsic product quality but from bundling and defaults. After all, if Google can use search to push users to its Maps product, Maps will gain market share even if competitors’ services are, on their merits, superior.

Yet it would be untenable to ask Google to disavow new businesses. It is hard to imagine a modern search engine without maps, news, or local search (among other functions largely absent from core search a decade ago). If legal intervention prevented Google from entering these fields, users might lose the useful functions that stem from integration between seemingly-disparate services.

What remedy could offer a fair chance of multiple surviving vendors (with attendant benefits to consumers), while still letting Google offer new vertical search services when it so chooses? E.C. antitrust litigation against Microsoft is squarely on point, requiring Microsoft to display a large choice screen that prompts users to pick a web browser. An initial listing presents the five market-leading options, while seven more are available if a user scrolls. But there is no default; a user must affirmatively choose one of the various options.

Taking the “browser choice” concept to search results, each vertical search service could, in principle, come from a different vendor. If a user prefers that her Google algorithmic search present embedded maps from Mapquest along with local search from Yelp and video search from Hulu, the user could configure browser preferences accordingly. Furthermore, a user could make such choices on a just-in-time basis. (A possible prompt: “We noticed you’re looking for a map, and there are five vendors to choose from. Please choose a logo below.”) Later, an unobtrusive drop-down could allow adjustments. The technical barriers are reasonable: External objects could be integrated through client-side JavaScript — just as so many sites already embed AdSense ads, YouTube player, and other widgets. Or Google and contributors might prefer server-to-server communications of the sort Google uses in its partnerships with AOL and with Yahoo Japan. Either way, technology need not stand in the way.

I credit that many users may be content with most Google services. For example, Google Maps enjoyed instant success through its early offering of draggable maps. But in some areas, Google’s offerings have little traction. Google’s Places service aspires to assess quality of restaurants and local businesses — but Yelp and Angie’s List draw on specialized algorithms, deeper data, and longstanding expertise. So too for TripAdvisor as to hotel reviews, and myriad other sites in their respective sectors. A user might well prefer to get information in these areas from the respective specialized services, not from Google, were the user able to make that choice.

Google often argues that competition is one click away. But here too, the E.C.’s Microsoft litigation is on point. Users had ample ability to install other browsers if they so chose, but that general capability was not enough when the standard operating system made one choice a default. Furthermore, at least Windows let other browsers truly immerse themselves in the operating system — as the default viewer for .HTML files, the default application for hyperlinks in email messages, and so forth. But there is currently no analogue on Google — no way for a user, even one who seeks this function, to combine Google algorithmic search with a competitor’s maps, local results, or other specialized search services.

Banning Other Bad Behaviors: Tying

Using its market power over search, Google sometimes pushes sites to adopt technologies or services Google chooses. Sometimes, Google’s favored implementations may be competitively neutral — simply technical standards Google wants sites to adopt (for example, presenting an index of pages to Google’s crawlers in a particular format). But in other instances, Google uses its power in search to promote adoption of Google’s own services.

I first flagged this tactic as to Google Affiliate Network (GAN), Google’s affiliate marketing service. GAN competes in one of the few areas of Internet advertising where Google is not dominant, and to date Google has struggled to gain traction in this area. However, Google offers remarkable benefits to advertisers who agree to use GAN: GAN advertisers alone enjoy images in their AdWords advertisements on Google.com; their advertisements always appear in the top-right corner above all other right-side advertisements (never further down the page); they receive preferred payment terms (paying only if a user makes a purchase, not merely if a user clicks; paying nothing if a user returns merchandise, a credit card is declined, or a server malfunctions). Moreover, merchants tend to use only a single affiliate network; coordinating multiple networks entails additional complexity and risks paying duplicate commissions on a single purchase. So if Google can convince advertisers to use GAN, advertisers may well abandon competing affiliate platforms.

Google’s tying strategy portends a future where Google can force advertisers and sites to use almost any service Google envisions. Google could condition a top AdWords position not just on a high bid and a relevant listing, but on an advertiser agreeing to use Google Offers or Google Checkout. (Indeed, Checkout advertisers who also used AdWords initially received dramatic discounts on the bundle, and to this day Checkout advertisers enjoy a dramatic multicolor logo adjacent to their AdWords advertisements, a benefit unavailable to any other class of advertiser.) Google would get a major leg up in mobilizing whatever new services it envisions, but Google’s advantage would come at the expense of genuine innovation and competition.

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Bias in Search Results?: Diagnosis and Response

Edelman, Benjamin. “Bias in Search Results?: Diagnosis and Response.” Indian Journal of Law and Technology 7 (2011): 16-32.

I explore allegations of search engine bias, including understanding a search engine’s incentives to bias results, identifying possible forms of bias, and evaluating methods of verifying whether bias in fact occurs. I then consider possible legal and policy responses, and I assess search engines’ likely defenses. I conclude that regulatory intervention is justified in light of the importance of search engines in referring users to all manner of other sites, and in light of striking market concentration among search engines.

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Tying Google Affiliate Network

Disclosure: I serve as co-counsel in unrelated litigation against Google, Vulcan Golf et al. v. Google et al. I also serve as a consultant to various companies that compete with Google. But I write on my own — not at the suggestion or request of any client, without approval or payment from any client.

In one of the few areas of Internet advertising where Google is not dominant – where just three years ago Google had no offering at all – Google now uses tying to climb towards a position of dominance. In particular, using its control over web search, Google offers preferred search ad placement and superior search ad terms to the advertisers who agree to use Google Affiliate Network. Competing affiliate networks cannot match these benefits, and Google’s bundling strategy threatens to grant Google a position of power in yet another online advertising market.

Google shows algorithmic search results at the left side of users’ screens, while Google’s “AdWords” ads appear at the right and, often, top. Historically, Google has sold search ads on a cost-per-click basis: An advertiser is charged each time a user clicks its ad. With these offerings, Google has grown to a position of dominance in search and in search advertising — 77% share of U.S. web search in the US, with even higher levels in other countries.

While Google dominates online search, Google to date has made less headway in the area of affiliate marketing, an approach to online advertising wherein small to midsized sites (“affiliates”) receive payments paid if users click links and make purchases from the corresponding merchants. For example, Gap pays a 2% to 4% commission if a user clicks an affiliate link to Gap and goes on to make a purchase. While almost all of the web’s largest merchants run affiliate programs, as of the start of 2007 Google offered no affiliate marketing services. Only through its mid-2007 acquisition of DoubleClick did Google obtain an affiliate marketing program, then called Performics and now renamed Google Affiliate Network (GAN). But Google’s affiliate network began in third place in the US market — behind larger competitors Commission Junction and LinkShare.

Google now grants GAN advertisers preferred placement in search results. Notice that the three GAN ads appear with images, whereas ordinary AdWords ads show only text. And Google places all GAN image ads at the top of the right rail -- above all right-side AdWords ads. Beginning in November 2009, Google’s Product Listing Ads service gave GAN major advantages over competing affiliate networks. Within search ads, Google now includes listings not just to Google’s AdWords pay-per-click advertisers, but also to GAN advertisers. Through these placements, Google offers GAN advertisers four striking and valuable benefits:

  • Image ads. AdWords advertisements show only text. But GAN advertisements include an image — making GAN offers stand out in search results. See the three image ads highlighted in red in the screenshot at right.
  • Preferred placement. AdWords advertisements are ordered, Google says, based on how much each advertiser bids as well as Google’s assessment of ad relevance, click-through rate, and other factors known only to Google. But in my testing, all GAN ads appear at the top of the “right rail” of side listings — prominent, highly visible screen space that gets more attention than any AdWords listings below. Indeed, by pushing AdWords ads further down the page, GAN ads reduce the value of the AdWords slots. In the screenshot at right, notice that all three GAN image ads appear above all the right-rail AdWords ads.
  • Conversion-contingent payment. AdWords advertisers continue to pay on a per-click basis, incurring costs as soon as a user clicks a link. In contrast, GAN advertisers only have to pay if a user clicks a link and purchases a product.
  • Preferred payment terms. Because AdWords advertisers pay as soon as a user clicks, they must pay for users’ clicks even if servers malfunction, even if credit card processors reject users’ charges, and even if users return their orders or initiate chargebacks. In contrast, in all these circumstances, GAN advertisers incur no advertising costs at all.

I expect Google will argue that it is within its rights to package, bundle, and tie its products as it sees fit. I disagree. Here, Google ties its search offering to its affiliate network without an apparent pro-competitive purpose but with obvious anti-competitive effects. In particular, tying affiliate network services to preferred search ad format and placement gives GAN an advantage over competing affiliate networks, without efficiencies or other countervailing benefits to users or advertisers.

Furthermore, there is no plausible justification for providing image ads only to GAN advertisers or for granting all GAN ads positions above all right-side AdWords ads. To the contrary, Google could easily allow all AdWords ads to include images, and Google could instead intersperse GAN ads (and ads from other affiliate networks) among AdWords advertisements in whatever order auctions and algorithms fairly deem optimal. Those would be the natural product design decisions if Google genuinely sought to include images wherever useful and if Google genuinely sought to include affiliate ads whenever relevant. Because Google instead reserves these benefits for GAN advertisers, the natural inference is that Google reserves special rewards for advertisers choosing GAN — benefits that come at the expense of genuine competition in affiliate marketing services.

In the remainder of this piece, I discuss why the public should be concerned about Google’s tying tactics, then assess Google’s tying-based promotion of its various other products. I conclude with brief policy prescriptions.

Cause for Concern

I see four major reasons for concern in Google’s decision to tie GAN to preferred placements, format, and terms in sponsored search.

First, GAN’s tying threatens to extend Google’s dominance into yet another facet of online advertising. Google’s dominance in search and search advertising is well-known. But affiliate marketing is a rare area where, until recently, Google had little or no presence. By leveraging its dominance in search to take over yet another type of online advertising, Google will importantly limit advertisers’ options. Today, advertisers unhappy with Google’s AdWords prices or rules can consider working with independent web sites through affiliate programs not operated by Google. But if Google comes to dominate affiliate marketing, then even affiliate marketing will become unavailable to advertisers dissatisfied with Google. Indeed, knowing that it dominates multiple aspects of online advertising, Google will be in a position to raise prices that much further.

Second, GAN’s tying harms those AdWords advertisers who refuse GAN and buy only pay-per-click ads from Google. The more GAN ads Google puts above ordinary AdWords listings, the less visible AdWords advertisers become. AdWords advertisers are at a further disadvantage when Google gives image ads to GAN advertisers but not AdWords advertisers, and when Google offers preferred terms (e.g. refunds of advertising costs if a user returns a product) to GAN advertisers but not AdWords advertisers. Google promises that “the highest ranked ad is displayed in the most prominent position,” but when Google gives GAN ads the top positions, ordinary AdWords advertisers are left bidding on the leftovers. And as Google makes its left-side listings increasingly visual — inline maps, images, product pictures, video thumbnails, and more — advertisers need images to capture users’ attention. So AdWords-only advertisers, without image-based ads, end up at a significant disadvantage.

Third, for nearly a year Google has offered the Product Listing Ads benefits in “limited beta” available only to “a small number of participants” Google selects. In fact I’ve seen numerous advertisers, large and small, promoted in Product Listing Ads. But it is striking to see Google offer preferred listings only to those advertisers Google chooses to favor. Elsewhere Google argues that its auction-based ad sales are “equitable.” But when Google gives superior placement to its preferred advertisers, for nearly a year, Google’s rules seem the opposite of fair.

Finally, GAN’s tying is particularly worrisome in the context of other Google tactics. As detailed in the next section, Google uses and has used bundling and tying to enter and dominate numerous markets. If these tactics continue unchecked, we face a future where Google’s dominance stretches even further.

Google’s Tying Strategy More Broadly

Tying GAN to search is just one example of Google’s oft-repeated tactic of forcing customers who want one Google service to accept additional Google services too. This section presents a series of such examples.

Throughout, these tying examples fit the following form:

A [user type] who wants [desirable Google service] must also accept [unwanted Google service].

I now turn to specifics.

Tying to promote affiliate marketing services: An advertiser who wants top placement in Google search advertisements, image ads, and preferred payment terms must join Google Affiliate Network.

Details: See above.

Tying to promote low-quality syndicated search marketing services: An advertiser who wants placement through high-quality Google Search Network sites must also accept low-quality Google Search Network placements.

Details: Google’s Search Network includes some top-quality publishers such as AOL Search and New York Times. But if an advertiser contracts to advertise through Google Search Network, Google demands permission to also place the advertiser’s ads on whatever other sites Google selects, in whatever quantity Google chooses. Many of these placements are low-quality or worthless, including spyware popups, typosquatting sites, and deceptive toolbars. Many of these placements trick advertisers into believing they are receiving valuable traffic when in fact the traffic consists of users the advertisers had already reached or would receive anyway. Even if an advertiser learns about these problems, the advertiser must continue to pay for this traffic, on pain of losing access to Google’s high-quality search partners.

Tying to promote vertical search: A user who wants Google’s core algorithmic search results must also accept Google’s own vertical search results.

Details: Users relish Google’s highly-regarded algorithmic search results. But a user running search at Google also receives Google’s vertical search services: Whether the user prefers Bing Maps, Google Maps, Mapquest, or Yahoo Maps, Google Search always presents inline maps from Google, and so too for images, local businesses, products, scholarly articles, videos, and more. On one view, these vertical search services are an integral part of Google’s offering, but scores of competing vendors reflect a competing vision of users choosing core algorithmic search separately from vertical search services. By granting its special-purpose search services preferred placement, Google sharply reduces traffic to competing vertical search services.

Tying to promote ancillary mobile services : A mobile phone developer who wants Google’s Android certification and access to Android Market application store must also accept Google’s ancillary services, including geolocation.

Details: In a September 2010 complaint, Skyhook alleges that Google ordered Motorola not to ship a proposed device that would have included both Google Location Service and Skyhook’s XPS service, two distinct methods to determine a user’s geographic location. Skyhook claims that Google grounded its threat in Google’s Android Market application store: If Motorola shipped a device with software Google did not approve, Google would ban users of that device from accessing Android Market or running the apps available there. By requiring that Motorola omit Skyhook’s service in order to give users access to Google Market, Google denied users access to Skyhook.

Policy Prescriptions

Advertisers, consumers, policy-makers and the concerned public should give tying relationships a careful look. In principle, bundling previously-separate offerings can offer useful synergies and efficiencies. But bundling can also let a company expand from strength in one area into dominating numerous additional fields — limiting choice, raising prices, and reducing innovation.

In some instances, it may not be obvious how to separate bundled products. For example, there is currently no single clear mechanism whereby Google search results could embed maps, product feeds, or other structured or interactive information from other search services. Pending a compelling plan to unbundle vertical results from core search, my instinct is to save this problem for later — albeit perhaps requiring disclosure of favored treatment Google gives its own search services, or limiting the permissible extent of such favored treatment.

In other instances, market structure and product design yield a natural vision of products that could be separate, generally are separate, and should rightly remain separate. To my eye, these principles ring particularly true in the separation between search marketing and affiliate marketing. There is no logical reason why GAN advertisers should enjoy the only listings with images. Nor is there any logical reason why all GAN ads should appear above all right-side AdWords ads. When Google grants its GAN advertisers these special benefits, the best conclusion is that Google is using its dominance in search to establish dominance in affiliate marketing — seizing an unearned advantage over competing affiliate marketing services. These exclusionary tactics are unjustified and improper, and they ought not be permitted.

Google’s first step should be to cease tying Google Affiliate Network to preferred search placement, format, and terms: An advertiser seeking to include image ads should not have to sign up with GAN, nor should GAN ads arbitrarily appear above competitors. A recent post at Channel Dollars off-handedly reports that Product Listing Ads “has been taken out” GAN and “is being merged into” AdWords. That’s a fair start. But even temporary ties can impede competition, and Google has delivered these large benefits only to GAN advertisers for some ten months.

Meanwhile, Google’s preferred treatment of selected GAN advertisers foreshadows a worrisome future. If Google can give preferred treatment to advertisers who use GAN, what prevents preferred treatment of advertisers who support Google’s regulatory agenda, and inferior treatment of advertisers who complain to policy-makers? Indeed, I doubt that Google invited to Product Listing Ads any advertisers who have publicly criticized Google’s practices. Google’s ability to distribute valuable but opaque favors to preferred advertisers — and to withhold such favors from anyone Google dislikes — makes Google’s power that much stronger and, to my eye, that much more troubling.

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Public comment on Enhanced Airline Passenger Protections

In 2010, the Department of Transportation issued a Notice of Proposed Rulemaking (NPRM) as to enhancing airline passenger protections. I filed a comment as to one of the subjects under discussion: whether and how airlines should be required to disclose fees through GDS’s, and what might happen if the DOT imposed such a duty without airlines contracting in advance to obtain such service from GDS’s.

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Google Inc. (teaching materials) with Thomas Eisenmann

Edelman, Benjamin, and Thomas R. Eisenmann. “Google Inc.” Harvard Business School Case 910-036, January 2010. (Revised April 2011.) (Winner of ECCH 2011 Award for Outstanding Contribution to the Case Method – Strategy and General Management.) (educator access at HBP.)

Describes Google’s history, business model, governance structure, corporate culture, and processes for managing innovation. Reviews Google’s recent strategic initiatives and the threats they pose to Yahoo, Microsoft, and others. Asks what Google should do next. One option is to stay focused on the company’s core competence, i.e., developing superior search solutions and monetizing them through targeted advertising. Another option is to branch into new arenas, for example, build Google into a portal like Yahoo or MSN; extend Google’s role in e-commerce beyond search, to encompass a more active role as an intermediary (like eBay) facilitating transactions; or challenge Microsoft’s position on the PC desktop by developing software to compete with Office and Windows.

Supplements:

Google Inc. (Abridged) – Case (HBP 910032)

Teaching Materials:

Google inc. and Google Inc. (Abridged) – Teaching Note (HBP 910050)

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Towards a Bill of Rights for Online Advertisers

Edelman, Benjamin. “Towards a Bill of Rights for Online Advertisers.” Advertising Week (September 21, 2009).

Online advertising presents remarkable efficiencies–better targeting, improved measurement and greater return on investment. Yet there are challenges, particularly when networks of intermediaries place ads through convoluted relationships, and all the more so when small advertisers cannot effectively negotiate terms dictated by advertising powerhouses. The result is a troubling mess of ads gone wrong–advertisers charged in ways they didn’t fairly agree to, and on terms they didn’t meaningfully accept. But online advertising doesn’t have to be a wild west. I propose five specific rights advertisers should demand as they buy online placements.

Advertising Week abridgement extracted from full original article:

Towards a Bill of Rights for Online Advertisers

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PPC Platform Competition and Google’s "May Not Copy" Restriction

By all indications, Google AdWords features far more advertisers than competing PPC platforms such as Yahoo Search Marketing and Microsoft adCenter. (Consider: Search for “thinkpad x60 power supply” at Google, and there are six relevant ads from vendors who actually sell that product. Search at Yahoo Search or Microsoft Live Search, and there are various ads from indexers and aggregators, but only one or two from vendors directly selling the product. Other searches for offbeat, unusual or region-specific keywords show similar patterns.)

Why do more advertisers choose Google? Because more users search at Google, Google can offer wider ad distribution than any single competitor. So if an advertiser had to choose just one ad platform, Google would be the natural choice.

But in principle advertisers can easily use multiple ad platforms. Ads are trivially small plaintext data, and In principle ads can be copied from platform to platform without restriction. So why don’t more Google advertisers use Yahoo, adCenter, and others too?

One possible answer comes from a little-noticed Google AdWords API Terms & Conditions restriction which substantially hinders advertisers’ efforts to use multiple providers — exactly prohibiting software vendors from helping advertisers copy AdWords campaigns to competing platforms. In this article, I identify the restriction at issue, analyze its effects on advertisers and competing ad platforms, critique response from Google, and compare this restriction with Google’s commitment to “data portability” in other contexts.

The Restriction at Issue

To use the Google AdWords API, a software developer must accept Google’s AdWords API Terms & Conditions. The T&C’s include the following requirement:

“Any information collected from an input field used to collect AdWords API Campaign Management Data may be used only to manage and report on AdWords accounts. Similarly, any information or data used as AdWords API Campaign Management Data must have been collected from an input field used only to collect AdWords API Campaign Management Data. For example, the AdWords API Client may not offer a functionality that copies data from a non-AdWords account into an AdWords account or from an AdWords account to a non-AdWords account.” (emphasis added)

Sure enough, searching the web for commercial tools to synchronize PPC campaigns or to export data from Google to competing platforms, I found none.

The “May Not … Cop[y] Data” Prohibition: Effect on Advertisers

The quoted restriction prevents advertisers from easily exporting ads from Google to a competing paid search provider. Consider: The essence of an export procedure is to copy data from an AdWords account to a non-AdWords account — exactly what the restriction prohibits.

Indeed, available export procedures are strikingly complex. For example, to import a Google AdWords campaign into Microsoft adCenter, Microsoft offers a 17-step procedure (with some steps made more complicated by the presence of multiple sub-steps).

Microsoft’s procedure is necessarily convoluted because Google’s “may not … cop[y]” restriction prevents Microsoft, or any other vendor, from writing a tool that connects to the Google API, downloads an advertiser’s ads, and uploads those ads directly to, e.g., Microsoft adCenter. Instead, advertisers must download data manually, reformat it to match adCenter’s requirements, and upload it to Microsoft — just as Microsoft’s lengthy procedure specifies.

For many advertisers, Google’s restrictions on data export impose an ongoing burden even beyond the advertiser’s initial signup with a competing PPC provider. Consider an advertiser that changes its ads or keywords often — perhaps selling seasonal merchandise, or experimenting with alternative advertising strategies. Such an advertiser would typically prefer to make changes in one place, and have the changes automatically propagate to all the advertiser’s PPC platforms. If Google remains the advertiser’s primary PPC provider, the advertiser would probably want to make changes in Google’s interface, then have other PPC platforms optionally automatically copy those changes. But Google’s “may not … cop[y]” restriction applies equally to ongoing resynchronizations. If an advertiser made daily changes to its Google campaigns, it would have to daily repeat the manual export/import process — a task that would be both time-consuming and prone to error.

In short, the net effect of the quoted restriction is to reinforce the tendency of small to medium-sized advertisers to “single-home” — to use only Google AdWords, to the exclusion of competing platforms.

At their peril do advertisers rely solely on Google: If advertisers get stuck using only Google, for lack of any easy and efficient way to buy some traffic elsewhere, Google can charge prices higher than competing platforms. Of course Google can’t raise prices infinitely; at some point, advertisers would overcome the lock-in, accept manual export, and copy ads to competitors. But Google’s “may not copy” restriction increases the costs of multi-homing — letting Google charge that much more than competitors, without advertisers facing compelling incentives to look elsewhere.

The “May Not … Cop[y] Data” Prohibition: Effect on Competing Ad Platforms, on Publishers, and on Users

By encouraging small to medium-sized advertisers to advertise only with Google AdWords, Google’s API restriction reduces the number of advertisers using competing ad platforms. This harms competing platforms in two distinct ways. First, it reduces competitors’ coverage — preventing competitors from featuring relevant ads that pertain to obscure user searches. (Consider the power supply example from the first paragraph of this piece — better and more useful ads at Google.) With fewer relevant ads, the competing platform offers users an inferior service — inviting users to look elsewhere, and reducing the likelihood of a paid click that would earn the platform an advertising fee.

Second, by reducing the number of advertisers bidding for advertising positions at other platforms, the quoted provision dramatically reduces revenue at those platforms. My December 2006 Optimal Auction Design in a Multi-unit Environment estimates the revenue benefits of additional advertisers based on publicly-available data and estimates of market fundamentals. The intuition is straightforward: When many advertisers seek positions for a given search term, they must bid higher to avoid being outbid and receiving inferior listing position. Conversely, when only a few advertisers seek positions, prices can be strikingly low since even a low bid earns a prominent position.

Google’s API restriction also reduces the value of advertising inventory held by third-party publishers. Consider a publisher seeking to sell its sponsored search or other text ad inventory to a provider of sponsored search services. In general, Google can afford to pay more because Google’s revenue per search is higher than competitors’. But how much will Google offer? Google maximizes profits by narrowly outbidding competitors; anything higher is waste. So the weaker competitors become, the lower Google can bid — and the less revenue publishers receive for the traffic they sell. Google’s “may not copy” API restriction serves a role in weakening competing platforms — keeping advertisers using Google alone, and hence reducing competing ad platforms’ ability to pay for publishers’ inventory.

End users also suffer from Google’s restriction on copying ads. Were it not for Google’s restriction, more advertisers would sign up to use competing ad platforms — increasing the usefulness of Yahoo Search and Microsoft Live Search for the users who choose those services.

Google’s Response

I forwarded these concerns to Google in March, and I managed to get in touch with Doug Raymond, product manager for AdWords API. Doug offered three rationales for the restriction. The list below summarizes his arguments (black) and my responses (blue).

  • Google: The quoted provision only applies to third-party developers. Individual advertisers remain free to write software that exports their Google campaigns.
    • Small to medium-sized advertisers don’t want to be developers. Rather, they want to use code that others write. That’s exactly why the AdWords API offers a concept of developers, rather than requiring that every advertiser write its own code.
    • As a leading provider of centralized computing services, as distinguished from small programs individual users build themselves, Google well knows the benefits of rigorous design by competent professionals.
  • Google: Advertisers can extract their data in other ways, e.g. a comma-separated-value (CSV) file.
    • Manual export is convoluted, slow, and error-prone. API-based access would be faster, easier, and more reliable.
    • The existence of an inferior alternative does not justify imposing restrictions that prohibit superior implementations.
    • In other contexts (detailed below), Google has made strong requests for, and commitments to, data portability.
    • In other contexts, Google emphasizes the benefits of streamlined, automated data transfer — never viewing convoluted manual procedures as an acceptable alternative.
  • Google: Third-party developers ought not have free access to advertiser data.
    • Google’s AdWords API already offers an appropriate security model to limit developers to serving those AdWords advertisers that have specifically granted such permission. In short, a developer needs a password to access an advertiser’s account.

Google’s Position on Data Portability in Other Contexts

Google’s prohibition on AdWords API data export stands in sharp contrast to Google’s position on data portability in other contexts. Indeed, Google has previously taken a firm position in favor of data portability. Some specific examples: In a November 2006 interview at the Web 2.0 Summit, Schmidt specifically promised that “We [Google] would never trap user data.” Schmidt added that “If users can switch it keeps us honest.” Just last month, Google CEO Eric Schmidt called for open access to (and indexing of) social network data — telling IBM’s Business Partner Leadership Conference “People should be able to move from place to place, and their data is available everywhere” and “open is best for the consumer.” Well-known Google blogger Matt Cutts summarized Google’s commitment to data openness with the catchy title “Not trapping users’ data = GOOD” and a long list of Google products that support data export.

I credit that Schmidt’s statements refer to other kinds of data — search engines’ records of users’ search history, and a wide assortment of data held by social networks. But the same principles plainly apply to access to search ads: Just as consumers benefit from being able to move their data as they see fit, so too do advertisers benefit from flexibility.

Moreover, it strains credibility for Google to ask social networks to share their data with Google, while Google simultaneously imposes contractual roadblocks preventing others from accessing Google data.

Next Steps and Google’s Other Restrictions

Google already faces antitrust scrutiny for its striking growth and market share. In that context, it’s particularly hard to defend the restriction at issue — a barrier to competition, without any apparent pro-competitive purpose. Regulators might reasonably require that Google remove the quoted provision — letting third-party developers export and synchronize AdWords data if advertisers so desire. This would be a trivially straightforward requirement — just a sentence to be stricken from Google’s AdWords API T&C’s. Because Google’s existing APIs already provide the required data, Google would not need to add any new code or any new API functions.

Other AdWords API restrictions also deserve scrutiny. For example, Google insists that advertising tools collect AdWords instructions through separate fields not used for other ad platforms — blocking simplification via a single interface to streamline advertisers’ decisions. Google prohibits advertising tools from storing Google data in a single relational database along with data for other ad platforms — increasing the complexity of designing a system to manage campaigns on multiple platforms. And Google prohibits reports that compare Google ad performance data (e.g. costs and profits from advertising at Google) with data from other ad platforms — hindering advertisers’ efforts to evaluate competitors’ offerings. I gather Google defends these restrictions on the grounds that they purportedly prevent advertiser confusion. Perhaps — but their more obvious effect is to increase the costs and complexity of using competing ad platforms. Perhaps I’ll consider these restrictions in greater detail in a future article.

Meanwhile, I’m struck by Google’s calls for data portability in other contexts. With Google’s ongoing request that other companies provide data to Google, perhaps Google will return the favor by abandoning its “may not copy” restriction — ideally promptly and unilaterally, without requiring that regulators force Google’s hand.

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Microsoft adCenter (teaching materials) with Peter Coles

Coles, Peter, and Benjamin Edelman. “Microsoft adCenter.” Harvard Business School Case 908-049, January 2008. (Revised February 2010.) (educator access at HBP. request a courtesy copy.)

Microsoft considers alternatives to expand its presence in online advertising, especially text-based pay-per-click advertising. Google dominates, and it is unclear how Microsoft can grow, despite considerable technical and financial resources. Microsoft considers a set of alternatives, each with clear benefits but also serious challenges.

Teaching Materials:

Microsoft adCenter (Teaching Note) – HBP 908062