(Bloomberg) — It reads like a grand conspiracy of the nerds.
On Wednesday, Texas Attorney General Ken Paxton filed an antitrust lawsuit against Alphabet Inc.’s Google. At its center is a bold claim: Google colluded with archrival Facebook Inc. in an illegal deal to manipulate auctions for online advertising, an industry the two companies dominate. Google named the secret pact after a Star Wars character.
“Any collaboration between two competitors of such magnitude should have set off the loudest alarm bells in terms of antitrust compliance,” the Texas lawsuit read. “Apparently, it did not.” Google disputed the allegation it had done anything improper, while Facebook declined to comment.
“This allegation is inaccurate,” Google said in an emailed statement. “Facebook Audience Network (FAN) is one of over 25 companies participating in our Open Bidding program. There’s nothing exclusive about their involvement and they don’t receive special data. The whole goal of Open Bidding is to work with a range of ad networks and exchanges that are important to our publisher partners.”
The complaint centers on automated ad technology called header bidding that routes digital ads into a live auction. It’s designed to increase the money web publishers, such as news outlets, can get for their ad real estate. With more bids from the widest array of sources, rates go up.
By 2016, 70% of major publishers used header bidding from a variety of smaller advertising technology companies. That posed a threat to Google’s ad exchange system because the approach opened up the bidding process to other exchanges. So Google created a program to “secretly let its own exchange win,” according to the Texas suit. (This was named after a Star Wars character, although the state redacted the name.)
Enter Facebook. The social network introduced header bidding for its own ad-selling tools in 2017. A year later, it brought it to mobile apps. This tool allowed Facebook to take small cuts of ads sold across the web and on mobile phones, not just on its own properties like Instagram.
It also directly competed with Google. But Facebook soon pulled back from the practice. It did so, the Texas suit said, because Google cut a deal, signed at the “highest-level,” that let Facebook sell ads on mobile apps more quickly and gave it other advantages in ad auctions. This deal, too, was given a codename related to Star Wars. The suit redacted the name, but the Wall Street Journal reported it was “Jedi Blue.”
“Google understood the severity of the threat to its position if Facebook were to enter the market and support header bidding,” Texas said in the complaint. “To diffuse this threat, Google made overtures to Facebook.”
The suit, backed by several other states, also accused Google of tricking publishers into buying ads through Google services rather than header bidding.
“If the AGs can back up those kinds of claims, well, this is a hell of a case and I think there could be massive liability,” said Chris Sagers, a law professor at Cleveland State University. Allegations about the deal with Facebook set “this complaint significantly apart from any of the other major litigation pending against the dominant online platforms.”
Still, extensive redactions make it hard to judge the strength of the evidence. If the details of the case end up being weak, the agreement might look “like a pretty garden-variety collaboration deal in which Facebook got some sort of functionality it needed from Google,” Sagers added.
Header bidding is an arcane process in ad tech, an industry thick with suppliers, middlemen and marketers. While it’s automated, there are often bespoke deals. Major providers like Google, for instance, often give ad buyers and websites discounts in the auctions if enough money is flowing through.
It’s a fairly common mechanism called “marking up,” giving a company an edge over others, according to Bob Walczak, an industry veteran. A deal between two firms, even giants like Google and Facebook, could be standard practice, he said.
“Maybe they’re rigging a game a little bit. But in the reality of ad tech, that’s commonplace,” said Walczak. “These are all just auction dynamics. These are business deals.”
A Google spokeswoman said Facebook is one of 25 companies in an “open bidding” service the company’s exchange offers and receives no special data. The company declined to disclose the name of the Star Wars character.
(Updates with Google comment in fourth paragraph)
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