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Thursday, April 18, 2024

Texas Accuses Google and Facebook of an Illegal Conspiracy

Forget the Marvel Cinematic Universe. The crossover event of the year is here, and it’s Google/Facebook.

A lawsuit filed today by a coalition of state attorneys general, led by Texas’ Ken Paxton, accuses Google of making an “unlawful agreement” that gave Facebook special privileges in exchange for promising not to support a competing ad system. It’s just one of many claims made in a case that takes broad aim at Google’s monopoly over the online advertising ecosystem, but it could very well be the most consequential. The case is a civil suit, and it names only Google as a defendant. But if what Texas is alleging is true, then both companies may have violated federal antitrust law—and committed felonies in the process.

As described in the complaint, the scheme between Google and Facebook has its roots in 2017, when Facebook announced it would start supporting something called “header bidding.” The details are too wonky to get into here. Basically, Google, which runs the biggest online ad exchange, likes to make publishers give it first dibs on bidding to place an ad. (“Publisher” just means any website or app that runs ads.) Header bidding was a technical hack that allowed publishers to earn higher prices by soliciting bids from multiple exchanges at once. Google hated this, because it created more competition. When Facebook declared that it would work with publishers that used header bidding, it was seen as a provocation. The millions of businesses that advertise with Facebook don’t just advertise on Facebook; through the Facebook Audience Network, the company also places ads across the web, making it one of the biggest ad buyers on the internet. If it began supporting header bidding, that could cause Google’s ad platform to lose a lot of business.

Drawing on internal documents uncovered during its investigation, however, the Texas attorney general claims that Facebook’s leaders didn’t actually want to compete with Google; they wanted Google to buy them off. This seems to have worked. In September 2018, the companies cut a deal. Facebook, the complaint says, agreed to “curtail its header bidding initiatives” and send the millions of advertisers in its Facebook Audience Network to bid on Google’s platform. In return, Google would give the Facebook Audience Network special advantages in ad auctions, including setting aside a quota of ad placements to Facebook, even when the company didn’t make the highest bid. The agreement, the complaint says, “fixes prices and allocates markets between Google and Facebook.”

Here’s why that matters: The other antitrust cases filed against Google and Facebook this year—by the Justice Department for Google and the Federal Trade Commission and state AGs for Facebook—are based on Section 2 of the Sherman Act, which is about building a monopoly. In a Section 2 case, it isn’t enough to show that a company dominates a market; the government must also prove that it got to the top by using anticompetitive tactics rather than by just being the best.

The alleged conspiracy between Google and Facebook is different. It falls under Section 1 of the Sherman Act, which makes it illegal for two or more companies to make any contract or agreement “in restraint of trade.” (While the Texas case is a civil suit, the claims in it could conceivably serve as the basis of federal criminal charges.) A Section 1 case is much simpler. If there’s proof that the companies did agree to fix prices, rig bids, or just not compete with each other, that’s the end of the inquiry.

“If you can prove an agreement between two firms, once you have proof of that agreement, it is called per se illegal,” said Sally Hubbard, director of enforcement strategy at the Open Markets Institute, an anti-monopoly think tank. “This is why antitrust enforcers love to bring Section 1 cases, because if you can find evidence of more than one firm agreeing to fix prices, agreeing not to compete, agreeing to allocate a market—once you prove that agreement, it’s automatically illegal. It ends there.”

Google says there’s nothing improper about the arrangement. A company spokesperson said that Facebook is one of more than 25 companies that participate in Google’s Open Bidding program and doesn’t receive any special privileges.

Does Texas have evidence to the contrary? It’s tough to tell, because the complaint is maddeningly redacted. Unlike last week’s Facebook antitrust filing or the House report on Big Tech from over the summer, most of the juicy details and internal documents, including a screenshot of the contract terms between Facebook and Google, are blacked out. (The heavy redactions are not the only strange thing about the case. The Texas attorney general’s office, fresh off a losing effort to overturn the presidential election, announced the suit in a weird, amateurish video posted to Twitter before the case had been filed.) Still, there are some tantalizing clues. The document alludes to an email about the arrangement from Dan Rose, Facebook’s vice president of partnerships, to CEO Mark Zuckerberg. That suggests that whatever deal the two companies had was signed off on at the highest levels. Another heavily redacted section alleges Google violated users’ privacy in “egregious ways” after signing an agreement with Facebook in 2015 that gave the company access to "millions of Americans’ end-to-end encrypted WhatsApp messages, photos, videos, and audio files." (Facebook acquired WhatsApp the year before.)

Again, the Facebook arrangement is just one part of the Texas case. More broadly, the complaint accuses Google of taking advantage of its control over each step of the online advertising chain—from the tool businesses use to place ads, to the platform publishers use to make their ad space available, to the exchange where the two sides meet—in ways that stifle competition and pad Google’s bottom line.

Google strongly disputes the allegations. “Attorney General Paxton’s ad tech claims are meritless, yet he’s gone ahead in spite of all the facts,” a spokesperson wrote in an emailed statement. “We’ve invested in state-of-the-art ad tech services that help businesses and benefit consumers. Digital ad prices have fallen over the last decade. Ad tech fees are falling too. Google’s ad tech fees are lower than the industry average. These are the hallmarks of a highly competitive industry. We will strongly defend ourselves from his baseless claims in court.” (Facebook did not immediately respond to a request for comment.)

Google, in other words, is arguing that its role in online advertising has been good for everyone. That’s a great argument to make—for the parts of the case brought under Section 2. If Google and Facebook did make a deal to back off of direct competition—which, again, Google denies—none of those other factors will save the company from Section 1. Ever since the first rumblings of an antitrust movement against Big Tech began, the dominant companies have insisted that the sector is competitive, relying on their competitors’ existence to rebut the claim that they’re too big or powerful. Google may turn out to have relied on its competitors a little too much.

Updated 12-16-20, 7:33 pm ET: This story has been updated with additional comment from Google.

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