Behind a secret deal between Google and Facebook

Court documents show Google and Facebook cut a preferential advertising deal. Photo / Paige Vickers, The New York Times

Facebook was going to compete with Google for some advertising sales but backed away from the plan after the companies cut a preferential deal, according to court documents.

In 2017, Facebook said it was testing a new way of selling online advertising that would threaten Google's control of the digital ad market. But less than two years later, Facebook did an about-face and said it was joining an alliance of companies backing a similar effort by Google.

Facebook never said why it pulled back from its project, but evidence presented in an antitrust lawsuit filed by 10 state attorneys general last month indicates that Google had extended to Facebook, its closest rival for digital advertising dollars, a sweetheart deal to be a partner.

Details of the agreement, based on documents the Texas attorney general's office said it had uncovered as part of the multistate suit, were redacted in the complaint filed in federal court in Texas last month. But they were not hidden in a draft version of the complaint reviewed by The New York Times.

Executives at six of the more than 20 partners in the alliance told The Times that their agreements with Google did not include many of the same generous terms that Facebook received and that the search giant had handed Facebook a significant advantage over the rest of them.

The executives, all of whom spoke on condition of anonymity to avoid jeopardising their business relationships with Google, also said they had not known that Google had afforded such advantages to Facebook. The clear disparity in how their companies were treated by Google when compared with Facebook has not been previously reported.

The disclosure of the deal between the tech giants has renewed concerns about how the biggest technology companies band together to close off competition. The deals are often consequential, defining the winners and losers in various markets for technology services and products. They are agreed upon in private with the crucial deal terms hidden through confidentiality clauses.

Google and Facebook said that such deals were common in the digital advertising industry and that they were not thwarting competition.

Julie Tarallo McAlister, a Google spokesperson, said the complaint "misrepresents this agreement, as it does many other aspects of our ad tech business." She added that Facebook is one of many companies that participate in the Google-led programme and that Facebook is a partner in similar alliances with other companies.

Christopher Sgro, a Facebook spokesperson, said deals like its agreement with Google "help increase competition in ad auctions," which benefits advertisers and publishers. "Any suggestion that these types of agreements harm competition is baseless," he said. Google and Facebook declined to elaborate on the specifics of their deal.

The Wall Street Journal had reported on aspects of the draft complaint earlier.

The swell of recent antitrust cases filed against Google and Facebook has cast a spotlight on lucrative deals among Big Tech. In October, the Justice Department sued Google and homed in on an agreement with Apple to feature Google as the pre selected search engine on iPhones and other devices.

"This idea that the major tech platforms are robustly competing against each other is very much overstated," said Sally Hubbard, a former assistant attorney general in New York's antitrust bureau who now works at Open Markets Institute, a think tank. "In many ways, they reinforce each other's monopoly power."

Google and Facebook accounted for more than half of all digital advertising spending in 2019. In addition to displaying advertising on their own platforms, such as Google's search engine and Facebook's homepage, websites, app developers and publishers rely on the companies to secure advertising for their pages.

The agreement between Facebook and Google, code-named "Jedi Blue" inside Google, pertains to a growing segment of the online advertising market called programmatic advertising. Online advertising pulls in hundreds of billions of dollars in global revenue each year, and the automated buying and selling of ad space accounts for more than 60% of the total, according to researchers.

In the milliseconds between a user clicking on a link to a webpage and the page's ads loading, bids for available ad space are placed behind the scenes in marketplaces known as exchanges, with the winning bid passed to an ad server. Because Google's ad exchange and ad server were both dominant, it often directed the business to its own exchange.

A method called header bidding emerged, in part as a workaround to reduce reliance on Google's ad platforms. News outlets and other sites could solicit bids from multiple exchanges at once, helping to increase competition and leading to better prices for publishers. By 2016, more than 70 per cent of publishers had adopted the technology, according to one estimate.

Seeing a potentially significant loss of business to header bidding, Google developed an alternative called Open Bidding, which supported an alliance of exchanges. While Open Bidding allows other exchanges to simultaneously compete alongside Google, the search company extracts a fee for every winning bid, and competitors say there is less transparency for publishers.

The threat of Facebook, one of the biggest ad buyers on the internet, supporting header bidding was a grave concern at Google. The draft of the complaint reviewed by The Times cited an email from a Google executive calling it an "existential threat" that required "an all hands on deck approach."

Facebook announced in March 2017 that it was testing header bidding with publishers like The Washington Post, Forbes and The Daily Mail. Facebook also took a jab at Google, saying the digital ad industry had been handing over profits to "third-party middlemen who make the rules and obfuscate the truth."

Before Google and Facebook signed the deal in September 2018, Facebook executives outlined the company's options to Mark Zuckerberg, its chief executive, according to the draft of the complaint: hire hundreds more engineers and spend billions of dollars to compete against Google; exit the business; or do the deal.

To many in the ad industry, Facebook joining Google's alliance felt like a reversal on header bidding. One Open Bidding partner said it had been excited to be in discussions with Facebook about setting up an alternative to Google's alliance only to have conversations abruptly cease in 2018.

Facebook disclosed that it had joined Google's program in one line in a December 2018 blog post. But it did not reveal that Google, according to the draft complaint, provided Facebook with special information and speed advantages to help the company succeed in the auctions that it did not offer to other partners — even including a guaranteed "win rate."

In this market, where fractions of a second count, a speed advantage was decisive. Facebook had 300 milliseconds to bid for ads, according to court documents. But the executives at Google's partner companies said they usually had just 160 milliseconds or less to bid.

Facebook had yet another advantage: Direct billing relationships with the sites where ads would appear, according to the court documents. For most other partners, Google controlled pricing information, effectively putting up a wall between Open Bidding participants and site owners and hiding how much of winning bids sites end up receiving, the executives at other companies said.

Google agreed to help Facebook have a better understanding of who would be shown the ads by helping the company identify 80 per cent of mobile users and 60 per cent of web users, the documents said. But several other partners said they had little such help understanding who was being shown ads.

Adam Heimlich, chief executive of Chalice Custom Algorithms, a marketing and data science consulting company, said the deal gave Facebook so much advantage that it was like allowing the social network to "start every tournament in the finals."

Facebook promised to bid on at least 90 per cent of auctions when it could identify the end user and committed to spending a certain amount of money — as much as US$500 million a year by the fourth year of the agreement, according to the draft of the complaint. Facebook also demanded that data about its bids not be used by Google to manipulate auctions in its own favor, a level playing field not explicitly promised to other Open Bidding partners.

Perhaps the most serious claim in the draft complaint was that the two companies had predetermined that Facebook would win a fixed percentage of auctions that it bid on.

"Unbeknown to other market participants, no matter how high others might bid, the parties have agreed that the gavel will come down in Facebook's favor a set number of times," the draft complaint said. A Google spokesperson said Facebook must make the highest bid to win an auction, just like its other exchange and ad network partners.

While both companies said that the deal is not an antitrust matter, they included a clause in the agreement that requires the parties to "cooperate and assist" each other if they are investigated for competition concerns over the partnership.

"The word 'antitrust' is mentioned no less than 20 times" throughout the agreement, the draft complaint said.

Written by: Daisuke Wakabayashi and Tiffany Hsu
Photographs by: Paige Vickers
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