Last week, the Senate Judiciary Subcommittee on Antitrust held a hearing on competition in online advertising—and misconceptions about the marketplace are swirling. Though many claim that major players have hampered digital advertising, the numbers tell an entirely different story: over the last ten years, the number of ads bought and sold have increased by about 27% annually and prices have fallen.  New commentary from Manne, Bowman, and Fruits on Truth on the Market details the competitive nature of today’s digital advertising market and explains why antitrust is a misguided remedy to stated concerns. Highlights from the piece include:

— As the digital advertising market has grown, it has become increasingly competitive and dynamic.

— Vertical integration has ultimately made digital advertising more efficient. 

— Misguided antitrust remedies could make digital advertising worse for users, advertisers, and publishers.

As the digital advertising market has grown, it has become increasingly competitive and dynamic.

The digital advertising market has clear signs of growing competition: increasing quantity, decreasing cost, and increasing total revenues.  “Over the past decade, the price of advertising has fallen steadily while output has risen. Spending on digital advertising in the U.S. grew from $26 billion in 2010 to nearly $130 billion in 2019, an average increase of 20% a year. Over the same period the Producer Price Index for Internet advertising sales declined by nearly 40%. The rising spending in the face of falling prices indicates the number of ads bought and sold increased by approximately 27% a year. Since 2000, advertising spending has been falling as a share of GDP, with online advertising growing as a share of that. The combination of increasing quantity, decreasing cost, and increasing total revenues are consistent with a growing and increasingly competitive market.”

Despite its upward trajectory, digital advertising has not yet fully disrupted the broader advertising market. “It should be noted that advertising itself is only part of the larger marketing market of which non-advertising marketing communication—e.g., events, sales promotion, direct marketing, telemarketing, product placement—is as big a part as is advertising (each is roughly $500bn globally); it just hasn’t been as thoroughly disrupted by the Internet yet. But it is a mistake to assume that digital advertising is not a part of this broader market. And of that $1tr global market, Internet advertising in total occupies only about 18%—and thus display advertising only about 3%.”

Adtech products compete and innovate on several planes to best benefit consumers, advertisers, and publishers. “Different adtech products compete on their ability to target customers effectively, to serve ads quickly (since any delay in the auction and ad placement process slows down page load times for users), and to do so inexpensively. All else equal (including the effectiveness of the ad placement), advertisers want to pay the lowest possible price to place an ad. Similarly, publishers want to receive the highest possible price to display an ad.”

Vertical integration has ultimately made digital advertising more efficient.

In search of efficiency, vertical integration has streamlined digital advertising platforms— but strong competition remains. “Through a process of ‘vertical integration’ some companies, such as Google, brought these different processes under the same roof, with the expectation that integration would streamline the stack and make the selling and placement of ads more efficient and effective. The process of vertical integration in pursuit of efficiency has led to a more consolidated market in which Google is the largest player, offering simple, integrated ad buying products to advertisers and ad selling products to publishers. Google is by no means the only integrated adtech service provider, however: Facebook, Amazon, Verizon, AT&T/Xandr, theTradeDesk, LumenAd, Taboola and others also provide end-to-end adtech services.”

Misguided antitrust remedies could make digital advertising worse for users, advertisers, and publishers.

Calls for intervention overlook unintended consequences, in which “most likely everyone will be worse off.” “What is striking about these kinds of interventions is that all of them “work” by making Google worse for those that use it. Restrictions on Google’s ability to use data from other products, for example, will make its service more expensive and less effective for those who use it. Ads will be less well-targeted and therefore less effective. This will lead to lower bids from advertisers. Lower ad prices will be transmitted through the auction process to produce lower payments for publishers. Reduced publisher revenues will mean some content providers exit. Users will thus be confronted with less available content and ads that are less relevant to them and thus, presumably, more annoying. In other words: No one will be better off, and most likely everyone will be worse off.”

Breaking up adtech service providers would cause the “weakening of competition, not its promotion.” “So who would benefit from stopping Google from doing these things, or even forcing Google to sell its operations in this area? Not advertisers or publishers. Maybe Google’s rival ad intermediaries would; presumably, artificially hamstringing Google’s products would make it easier for them to compete with Google. But if so, it’s difficult to see how this would be an overall improvement. It is even harder to see how this would improve the competitive process—the very goal of antitrust. Rather, any increase in the competitiveness of rivals would result not from making their products better, but from making Google’s product worse. That is a weakening of competition, not its promotion.”

Antitrust framework changes are not needed to address existing ad tech concerns. “Most importantly, if the conclusion of Google’s critics is that Google’s main offense is offering a product that is just too good to compete with without regulating it like a utility, with all the costs to innovation that that would entail, maybe we ought to think twice about whether an antitrust intervention is really worth it at all.”