Google has been inflating ad prices for advertisers for years

Google has been inflating ad prices for advertisers for years

Last month, a federal judge ruled that Google violated U.S. antitrust law by maintaining a monopoly in the online search market. The court case, which began on September 6, 2024, could force Google to stop paying Apple for exclusive distribution. In extreme cases, there is even talk of the company being broken up.

Google pays Apple to remain the default search engine on Apple devices like iPhones and iPads. These payments ensure Google has priority access to users searching via the Safari browser or other built-in Apple features. In return, Apple receives a significant portion of Google’s advertising revenue generated through this traffic. The agreement benefits both companies: Apple earns billions of dollars annually, and Google maintains its dominance in search.

The decision on penalties could take a long time, and if the outcome is unfavorable for Google, the company will undoubtedly appeal. However, another serious threat looms on the horizon.

A striking example of such a breakup was the AT&T split in 1984. AT&T, which controlled nearly all U.S. phone communications through its monopoly Bell System, was divided into seven regional companies (known as Baby Bells). This decision opened the telecom market to competition and spurred the development of new technologies—mobile phones and the internet.

Bernstein Research analyst Mark Shmulik warns that Google should be wary of new lawsuits. Yelp has already filed one, and advertisers may be the next plaintiffs.

Yelp claims that Google prioritizes its own local services and reviews in search results, reducing the visibility and traffic of third-party sites offering similar services. Yelp argues that such actions violate antitrust laws and limit fair competition in the market.

The judge ruled that Google violated antitrust laws not only by paying Apple and other partners to suppress search competition. A less discussed but equally important finding concerns Google’s overwhelming influence on pricing in the search advertising market.

Google dominates

In addition to Apple, Google also strikes deals with other device and browser manufacturers to make its search engine the default. For instance, it partners with Samsung (for Android devices), Mozilla (for Firefox browser), and other smartphone and browser makers.

The monopoly allowed Google to inflate advertising prices for years. With no fear of advertisers defecting to competitors, the company forced them to unwittingly overpay for advertising through its platform.

"We could very well see a class-action lawsuit from advertisers demanding financial penalties for years of inflated prices," Shmulik writes. "It's likely that a lawsuit seeking damages exceeding $100 billion will be filed," he added in a recent note to investors.

Bernstein Research is an analytical firm that studies financial markets and provides investment recommendations. It analyzes data on companies, industries, and the economy, helping investors make informed decisions. Bernstein's analysts examine business performance, market trends, and events that may impact stock prices, offering forecasts. These studies are used by large investors, including funds and financial firms.

Unprecedented Market Power

In healthy markets, price increases by companies attract competitors with the prospect of high profits. This competition often curbs further price hikes or even leads to price reductions—to the benefit of the end consumer, in this case, advertisers.

However, the online search market has lacked healthy competition for at least a decade. Google systematically raised advertising prices without significant resistance from competitors—a situation highly unusual in a market economy.

Search advertising refers to ads that appear in search results when users enter queries in search engines like Google. Advertisers pay to have their ads displayed at the top of the results when people search for products or services related to their business. For example, a shoe store's ad may appear on the first page when someone searches for "sneakers."

Evidence presented during the trial showed that Google was able to increase ad prices by 5–15% without a significant advertiser shift to competitors, Shmulik explained.

Google is siphoning more money

The opposite phenomenon, known as advertising inventory devaluation, typically occurs. This happens when the cost of online ads decreases over time for several reasons: increased competition among platforms, a growing supply of available inventory, and advances in targeting technology, making ads more affordable. Advertising inventory is constantly under pricing pressure, and its value tends to decrease due to market saturation and other factors.

Shmulik estimated the potential financial damage advertisers could demand. He speculates that Google raised ad prices by approximately 5% annually over the last decade. Applying treble damages—a common practice in punishing monopolies—he concluded that the total fines could amount to at least $100 billion.

"Code Yellow"

In his ruling, Judge Mehta pointed out that Google raised prices for advertisers to meet profit targets.

U.S. Judge Amit Mehta is known for handling major antitrust cases, including against tech giants like Google. Appointed as a federal judge in Washington, D.C., he specializes in hearing complex cases involving antitrust violations and abuse of market dominance.

Last September, Google executive Jerry Dischler testified that the company adjusted its ad auctions to meet revenue goals. This sometimes led to price increases of up to 5%.

Jerry Dischler is one of Google’s key executives responsible for the search advertising and other ad products. As VP of product management, he plays a crucial role in developing advertising solutions, including Google Ads. Dischler is known for implementing innovations such as campaign automation and enhancing ad efficiency on the platform.

This practice is known as "supracompetitive pricing" and is not typically seen in truly competitive markets.

Google siphoning money

Supracompetitive pricing occurs when a company sets prices for goods or services significantly higher than under normal competition. This is typical of monopolies or companies with strong market influence, where consumers have no alternatives. As a result, they are forced to pay inflated prices. This practice harms the market and is often the subject of antitrust investigations, as it limits competition and harms consumer interests.

"When Google began to worry about hitting its revenue targets, it declared 'code yellow,' where the 'top priority' became 'ensuring revenue growth' by changing pricing," the judge's ruling said.

According to the DOJ lawsuit against Google, in 2019, the company declared a "code yellow" out of fear that it would miss a key revenue target.

The Google division responsible for search develops and improves Google Search—the world’s most popular search engine. It creates algorithms that help quickly find accurate information on the internet. This division also enhances the user experience by introducing new features such as voice search and image search. Another division, Google Ads, handles the monetization of search results.

Other companies have already seen new opportunities to fight the search giant. On August 28, 2024, Yelp filed a lawsuit against Google.

"Expect follow-up lawsuits from competitors, advertisers, and users," Bernstein's Shmulik warned. "The trial evidence clearly demonstrated Google's ability to raise ad prices through its pricing mechanisms, for which advertisers paid the price."

Google declined to comment on the situation.

Opinion Piece

In Russia, the online search and advertising market is dominated by Yandex, which holds a leading position in both search queries and internet advertising. The company actively uses its strong position, continuing to acquire advertising platforms, such as eLama, which should raise serious concerns among competitors and advertisers. This reduces competition in the market and could lead to Yandex gaining even more control over pricing and access to advertising tools. As a result, advertisers could find themselves with fewer alternatives, and ad prices could be artificially inflated, as seen with Google. This behavior brings the market closer to a monopoly, ultimately harming the development of advertising technology and conditions for market participants. Despite its dominance, Yandex continues to actively develop its advertising technology, improving its products, introducing new ad formats, and constantly seeking new business growth opportunities, making it an even more influential player in the market.

Yandex dominates in Russia

In Spain and Turkey, Google holds a dominant position, especially in search advertising, but the situation in these countries has its nuances.

In Spain, Google controls about 93% of the search market. Most advertisers actively use Google Ads for their campaigns, covering search, video, and display advertising. In this country, Google's activities are virtually unregulated.

The situation in Turkey is different. Despite Google’s dominance, Turkish antitrust authorities have fined the company multiple times for abusing its position—specifically for promoting its own services and limiting competition. For example, following a decision by the Turkish Antitrust Authority, Google was forced to remove shopping ad blocks from its search page, weakening its influence in this market segment.

In Turkey, the vast majority of users prefer Google for search—its market share reaches about 99%. Despite this, Yandex seeks to strengthen its position, though its share currently stands at just around 0.36%. In recent years, Yandex has taken active steps to expand its presence, including partnerships with major media companies and the launch of new products. However, despite these efforts, its share remains insignificant compared to Google, and no notable growth has been observed in recent times.

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