Microsoft PowerPoint - GoogleDoubleClick_FriederiszickACE 2008
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Preliminary remark
• We were engaged by Crowell & Moring on behalf of a large US advertiser opposing the merger
• Only involved in the first phase of the merger; limited data availability
• Worked together with Prof. Günther (HU)
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Contents
Characteristics of online advertising and Google’s outstanding market position in search
III Non-horizontal effects
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Online advertising small but increasing segment
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Source: World Advertising Trends 2007, World Advertising Research Center (www.warc.com).
Worldwide advertising expenditure
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
% S h a re
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Distribution of Worldwide Internet Advertising Expenditure
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Compared to the US online ad expenditure still underrepresented (exception: UK; Scandinavian countries)
Country/Region 2006
Czech Republic 23.8 19.0 2.3 1.8 0.02%
Greece 21.3 17.0 1.9 1.5 0.01%
Ireland 16.9 13.5 4.0 3.2 0.01%
Latvia 5.9 4.7 2.6 2.1 0.03%
Slovenia 5.8 4.6 2.9 2.3 0.02%
Estonia 5.3 4.2 4.0 3.2 0.03%
Lithuania 4.4 3.5 1.3 1.0 0.01%
Internet Advertising Expenditure per Region
Source: World Advertising Trends 2007, World Advertising Research Center (www.warc.com).
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Characteristics of on-line advertisement
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The traditional ad-server model
Pricing based on cost-per- click (CPC) and/or cost- per-impression (CPM)
Site- and user-specific ads
Viewer
Ad-server
Advertiser
Publisher
Pricing based on cost-per- click (CPC) and/or cost- per-impression (CPM)
Site- and user-specific ads
Viewer
Ad-server
Advertiser
Publisher
The Google model
sells space on search result pages based on search terms
Advertiser
sells space on search result pages based on search terms
Advertiser
I. Horizontal overlap
− DoubleClick operates in the direct channel
− Google operates in the indirect channel
The parties compete in selling ad serving products
i. DoubleClick sells ad serving products unbundled
ii. Google sells ad serving products bundled with intermediation
Advertisers and publishers consider the direct and indirect channels to be substitutes.
i. Advertisers allocate ad budgets across channels based on price and performance.
ii. Many publishers have direct sales and participate in Google network.
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I. Horizontal overlap
The merged firm will have an incentive to raise prices (non-coordinated effects)
i. An increase in Google search or content network prices will divert business to direct channel where DoubleClick operates
ii. An increase in DoubleClick prices will divert business from the direct channel to Google, especially to its content network but also perhaps its search engine. Google’s ad network may be a relatively close substitute for the direct channel based on better targeting
iii. An increase in DoubleClick prices will divert business from other ad networks in the indirect channel to Google’s network
Evidence
⇒ Market shares
⇒ Simulations using a range of substitution parameters indicate an incentive to raise prices post-merger. Prices effects may be significant given high margins, and given high shares for Google and DoubleClick where they operate.
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Google outstanding throughout Europe in search (stronger position in NL; weaker position in UK)
Page Views Active Reach Country Name
Dec 2006
Dec 2007
EU Total 100.0% 100.0% 0.0% 100.0% 79.2% 83.5% 5.3% 95.1%
1 Google Search 90.6% 92.4% 2.0% 92.2% 73.9% 79.1% 6.9% 87.4%
2 Yahoo! Search 5.0% 3.6% -28.6% 3.3% 13.9% 12.1% -13.3% 13.8%
3 MSN/Windows Live Search
2.3% 2.4% 3.0% 2.6% 15.2% 16.6% 9.2% 19.3%
4 AOL Search 2.0% 1.6% -19.5% 1.8% 4.9% 4.4% -11.0% 5.2%
5 Microsoft Search
Source: Nielsen Netratings Netview report
Search engine page view and active reach
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This is true even if one incorporates non-search sites
Page Views Active Reach Country Name
Dec 2006
Dec 2007
EU Total 100.0% 100.0% 0.0% 100.0% 87.9% 90.1% 2.5% 102.7%
1 Google 65.5% 70.1% 7.0% 54.6% 76.5% 81.9% 7.1% 91.1%
2 MSN/Windows Live
3 Yahoo! 24.0% 21.8% -9.0% 17.1% 41.9% 40.7% -2.8% 45.2%
4 AOL Media Network
5 Microsoft 3.2% 2.1% -34.0% 1.6% 60.7% 56.8% -6.4% 61.4%
Portal level page view and active reach
Source: Nielsen Netratings Netview report
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As an alternative, advertisers could reach maximal up to 23% - 44% of Google users by placing an ad on both Yahoo and MSN/Windows
AOL Search Google Search Microsoft Search
MSN/Windows Live Search
Dec 2006
Dec 2007
Dec 2006
Dec 2007
Dec 2006
Dec 2007
Dec 2006
Dec 2007
Dec 2006
Dec 2007
AOL Search 100% 100% 62% 66% 4% 3% 11% 14% 22% 11%
Google Search 5% 5% 100% 100% 3% 2% 13% 13% 13% 10%
Microsoft Search 10% 9% 95% 96% 100% 100% 28% 35% 16% 23%
MSN/Windows Live Search 5% 7% 84% 84% 6% 6% 100% 100% 23% 14%
Germany
Yahoo Search 11% 8% 85% 88% 3% 5% 23% 19% 100% 100%
Overlap analysis between the different search engines (example of Germany)
Source: Nielsen Netratings Netview report
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Publicly available price comparisons suggest significantly higher prices charged by Google
Source: IAC Advertising Solutions, Ask Sponsored Listings
Search Add provider CPA Average CPC
Ask Sponsored Listings $19.79 $0.38
MSN $36.28 $1.52
Google AdWords $46.78 $1.96
-> overall: outstanding market position of Google for search ads undisputed
Comparison of rates for search adds
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Market share (measured by ad expenditure) of Google and Google network in the global advertisement market.
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Advertising revenues Google Network Web Sites
Advertising revenues Google Web Sites
Source: Advertising Trends 2006, Yearly Statement Google 2004-2006, eMarketer
>38% MS
Estimated market share of DoubleClick (measured by expenditure; very rough estimate)
Online advertising
related revenues
US$ Million 5% Share of Total (%) 10% Share of Total (%)
100 2000 7.318 1000 3.659
150 3000 10.977 1500 5.488
300 6000 21.954 3000 10.977
Share of Total Online Advertising
given revenue percentage received from advertisers
Source: Internet Search, WARC 2007, own calculations
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II. Elimination of potential competition
Eliminating Google from stand alone ad serving products
i. DoubleClick currently sells ad serving products
ii. Google has significant advantages for entry into the ad serving market given its current ad serving experience (AdWords/Sense)
iii. Yahoo! and MSN do not possess the same advantages; they attract fewer advertisers and publishers, and would incur significant costs to convert proprietary products for third party customers
iv. Markets for ad serving products are concentrated; customer switching costs and fixed development costs create entry barriers and make entry by others difficult
v. Prior to announcing the merger, Google reportedly was testing an ad serving product that would compete with DoubleClick
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II. Elimination of potential competition
Eliminating DoubleClick from ad exchanges
i. Google currently functions as an ad exchange by bringing advertisers and publishers together via various automated products, including AdWords and AdSense
ii. DoubleClick announced prior to merger plans to introduce an ad exchange
iii. Because of its relationships with publishers and advertisers, DoubleClick has a unique ability to bring together sufficient buyers and sellers required for success (Barriers to successful entry with a new ad exchange include the need to attract liquidity from advertisers and publishers)
iv. Few, if any, other firms have a network of publishers and advertisers as extensive as DoubleClick
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III. Non-horizontal effects
Ability to foreclose (Google post-merger will open its network to
DoubleClick ad serving products)
i. Google can raise the price or degrade the functionality of DoubleClick products for customers that do not use Google’s network
ii. Google can charge different prices to different customers, and price discriminate against customers least likely to switch from DoubleClick
iii. Publishers and advertisers face relatively higher costs from switching ad serving products than switching ad networks (role of contracts!)
iv. Publishers will divert ad network volume to Google to avoid costs of switching away from DoubleClick
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III. Non-horizontal effects
Incentive to foreclose
i. Google faces competition in providing intermediation services to advertisers and publishers
ii. Google can leverage DoubleClick’s position in ad serving products to lead volume from competing ad networks to its own network
iii. Google will capture the margin on intermediation on volume that is diverted
iv. The profitability of such a strategy is enhanced by Google’s ability to selectively increase prices to existing DoubleClick customers
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III. Non-horizontal effects
Effect of foreclosure
i. Ad networks are characterized by network effects: advertisers and publishers prefer to use the same network/exchange others use
ii. Winning business from competing networks could reduce their ability to compete and make them less viable due to the loss of network effects
iii. If competing ad networks are weakened, Google can charge higher prices for intermediation services without losing significant volume
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Outlook
• Google states in their SEC filings:
− „We acquired DoubleClick primarily for their customer relationship, as well as patents and developed technology” • Value of customer relationship 630Mill.$; • Value of patents and developed technology: 143Mill.$
− “Customer relationship have a weighted-average useful life of 6.7 years”
-> This evidence goes against efficiency driven merger and confirms significant switching costs
• Google not listed as ad network mid 2007 by comScore; now already top 3
-> Google successfully expands its market position into market segment of ad networks
• Google’s planned but abandoned cooperation with Yahoo shows way forward
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* Entity has assigned some portion of traffic to other syndicated entities. ** Denotes an advertising network. † The Platform A ad network is an aggregation of ad servers used by the following individual advertising network entities: Advertising.com, Tacoda, AOL, Quigo and Userplane. †† comScore has verified that a legitimate business relationship exists between YuMe and Microsoft through documentation provided. Therefore the YuMe Video
Network – Media Partners entity meets all current rules for inclusion as a custom entity in the Ad Focus category.
Rank Property Unique Visitors
(000)
Reach %
1 Platform-A**† 171,062 90% 26 Undertone Networks** 81,372 43%
2 Yahoo! Network** 160,355 85% 27 Centro 78,276 41%
3 Google Ad Network** 153,529 81% 28 MYSPACE.COM* 75,295 40%
4 Specific Media** 153,258 81% 29 Vibrant Media** 73,978 39%
5 ValueClick Networks** 148,401 78% 30 Ybrant - Oridian - ADdynamix Network** 73,461 39%
6 Tribal Fusion** 142,736 75% 31 YOUTUBE.COM 73,322 39%
7 Yahoo! 138,309 73% 32 NNN Total Newspapers: U.S. 69,184 37%
8 YuMe Video Network - Media Partners †† 136,455 72% 33 Gorilla Nation Media 65,759 35%
9 Google 133,184 70% 34 Ask Network 58,566 31%
10 adconion media group** 130,155 69% 35 MSN.COM Home Page 57,585 30%
11 Casale Media Network** 129,944 69% 36 EBAY.COM 57,007 30%
12 Traffic Marketplace** 127,758 68% 37 IAC Ad Solutions – Media Partners 54,639 29%
13 DRIVEpm** 125,312 66% 38 TattoMedia** 53,854 28%
14 Revenue Science** 123,381 65% 39 Kontera** 53,328 28%
15 interCLICK** 122,496 65% 40 AMAZON.COM 48,336 26%
16 24/7 Real Media** 120,359 64% 41 MapQuest 47,441 25%
17 AOL Media Network 111,396 59% 42 Vizi Inc** 47,408 25%
18 CPX Interactive** 110,918 59% 43 NNN Top 25 47,178 25%
19 MSN-Windows Live 105,967 56% 44 Real Cities Network 47,075 25%
20 Tremor Media - Media Partners 104,687 55% 45 IB Local Network 47,029 25%
21 ADSDAQ by ContextWeb** 103,431 55% 46 PrecisionClick** 43,605 23%
22 Turn, Inc** 93,171 49% 47 AdOn Network** 42,655 23%
23 Burst Media** 91,054 48% 48 Epic Advertising (Azoogle Network Only)** 40,435 21%
24 Collective Media** 89,56 47% 49 FACEBOOK.COM 39,087 21%
25 AdBrite** 81,52 43% 50 EBAY.COM Home Page 38,732 20%