The Week CNBC Started to Panic
The government filed an antitrust case to break up Google, and the Senate held a brutal hearing on Ticketmaster's monopoly. Wall Street opinion leader Jim Cramer is officially freaking out.
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This issue I’m going to summarize an extraordinary week, with three major events taking place. Two represent progress for anti-monopolists. There was a groundbreaking Senate hearing on Ticketmaster’s monopoly, and the government filed a case seeking to break up Google. Wall Street is nervous at all the activity, which is why CNBC’s Jim Cramer went on a rant against FTC Chair Lina Khan.
The third event is more low-profile, but represents a major win for Big Tech. Ken Buck, the leading anti-monopoly Republican Congressman, just got fired from his position as the head of the antitrust subcommittee.
Let’s dive in.
Swifties Get Their Senate Hearing
Back in November, Live Nation/Ticketmaster, the gatekeeper to most live entertainment in America, got into trouble when it failed to anticipate huge demand for Taylor Swift concerts, resulting in outages and millions of angry and disappointed fans who couldn’t buy tickets. A few years ago, such a fiasco would cause frustration and nothing more, but the upsurge in antitrust interest and enforcement changed the game. The Senate Judiciary Committee announced a hearing, and it turns out the Antitrust Division was already investigating the company for monopolization.
When this scandal happened, I went over the backstory on Ticketmaster. Suffice to say, it’s such a blatant monopolization story that the firm put on its website that it acquired its major competitor. That’s a violation of the Clayton Act, not website fodder.
Live Nation was put on the spot Tuesday in the very first hearing of the new Congress. Many such moments are easy for corporations to dodge, with a few old uninterested men reading boring questions that are easily dodged by slick lawyers. This time, the opposite occurred. For four hours, Live Nation’s President Joe Berchtold had to absorb the anger of both Republicans and Democrats, virtually every one of whom accused the corporation of having and abusing its monopoly. The Senators were so good that some moments became TikTok memes.
I live-tweeted the hearing here, and there are plenty of write-ups, so I’ll just give you my key takeaway. And that is, Live Nation’s days as a monopolist are numbered.
Here’s why. Sure, Swifties are mad. Two different groups of fans have already filed private antitrust lawsuits against the firm. But as Senator Blumenthal noted, Ticketmaster unified all of them in hatred of the ticketing firm. Even the libertarian who was asked to testify said, in effect, yes Ticketmaster is a monopolist, but please just use the consumer welfare standard when you break them up.
In other words, the Antitrust Division got a green light from Congress for a case. And this Antitrust Division, as Doha Mekki, the number two in the division, made clear in a speech yesterday, is not playing around.
And then there was Google. Tuesday morning, Ticketmaster got roasted. That afternoon, Attorney General Merrick Garland announced that the Antitrust Division, along with eight states, filed an antitrust suit to break up Google’s advertising business.
That’s a powerful one-two punch, and Wall Street reacted angrily. Live Nation is a beloved asset among financiers, because billionaire consolidator John Malone, who is an opinion leader in corporate America, has controlled it for years. And Google is one of the two most important stocks in the market, with many hedge funds leaning on the firm for reliable returns. To have both of these firms hit in one day by populists they used to be able to ignore is outrageous. Populists are supposed to be silly and harmless, not challenge bankers in their core competency.
Wall Street is right to take this action against Google seriously. Google is now facing at least five antitrust lawsuits from different U.S. government entities over various lines of business, including search, the app store/Android, and its stand-alone advertising arm.
This suit is unique in a few ways. First, the government explicitly asked for a break-up, which means enforcers are unlikely to negotiate for a weak remedy. Second, enforcers want a jury trial. Complex antitrust matters almost always go before a judge, and devolve into technocrats throwing jargon at each other. As Antitrust Division chief Jonathan Kanter has made clear, he believes antitrust law is something that belongs to the public, not judges or an elite legal fraternity. A jury trial is the purest distillation of that vision. Third, the case is going to be in the Eastern District of Virginia, which is also known as the ‘rocket docket,’ because delays are very difficult to secure in that district. So we can expect a trial in between twelve to eighteen months.
A Trial Over Plumbing
This particular Google case needs a bit of explanation, because it involves advertising, which is something no one likes. Google has many subsidiaries, including a search engine, Maps, Gmail, and YouTube. It also controls the plumbing underneath most online advertising, which is to say, the revenue that newspapers rely on.
Google’s advertising technology business has a little over $30 billion of revenue annually, though not all of that is in the U.S. Google as a whole brings in more than a quarter of a trillion dollars, so its adtech line isn’t most of its revenue. Still, it’s a strategic area for the firm. And the stakes are quite high for our democracy. We all know newspapers are dying. This suit shows the reason is not that publishers couldn’t adapt to the internet, but that Google is stealing their money.
So what does Google do in this line of business, and why is the DOJ alleging monopolization? First let’s talk about advertising markets. There are many types of advertising, and each type is bought for different purposes. One purpose might be to get someone to click on a site or app. An ad next to a search result works for that kind of direct response advertising. A different purpose is to generate a positive association between a consumer and a brand. A video ad next to a Wall Street Journal article might work to accomplish that. Another purpose could be to buy digital shelf space, which is why firms purchase ads on Amazon or Walmart in front of consumers searching for specific products on those sites.
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If you are an ad buyer, you want ad formats that meet your specific needs. Though it’s all advertising, different ad formats are not interchangeable. An ad on TikTok cannot really substitute for a Google search ad, or a banner ad on CNN. (Amazon once tried replacing all Google search advertising as an experiment though its Mexican subsidiary, buying billboards and other forms of advertising. It did not go well.)
This particular antitrust suit involves display ads on the open web, which are what you find on the Wall Street Journal or ESPN. These ads are bought and sold in an unusual manner. If a user goes to the site of a newspaper, unbeknownst to the consumer, a highly complex financial market kicks into gear. Newspapers no longer sell most of their advertising directly, but have become integrated into a giant set of global auctions. In these auctions, advertisers bid for the right to place their ad not into a specific newspaper, but in front of a specific user. Money then changes hands, from the buyer of the ad to the publisher, with a set of middlemen each taking a cut. This happens in a split second, billions of times a day. At this point, online advertising is far bigger than the stock market in terms of the number of transactions.
Well guess who runs the software to manage this financial market? Google. And guess who takes the lion’s share of the revenue? Google.
Or at least, that’s the claim by the Antitrust Division. The story the DOJ is telling starts with Google transitioning from its role as a search engine into the main intermediary of all online advertising, in the mid-2000s. In 2005, Google had a lot of advertisers that were buying its search ads. It also started to let smaller websites put strips of ads up, and paid them per click. Ad industry insiders at the time realized that advertising was transitioning from a Mad Men-style set of regional, local, and national markets to an automated set of marketplaces.
Google’s strategy wasn’t to remain a search engine, but to expand and control all online advertising. But the firm had a problem. It couldn’t break into the market for the space on big established publisher sites, because that market was already controlled by another near-monopolist, DoubleClick. DoubleClick had 60% market share in the software used by publishers to manage how they sell ads on their site, or what’s known as an ad server. Because of its ad server positioning, DoubleClick could see where most users were going on the web. While Google tried to compete with its own ad server, it couldn’t make much progress, because publishers don’t want to change what is in effect the operating system for their business. As DoubleClick’s CEO put it, switching “platforms is a nightmare. Takes an act of God to do it.”
So Google’s then-CEO, Eric Schmidt, did what every good monopolist does when in a lax policy regime - he bought DoubleClick in 2007. Google then had all the elements needed to organize the market. It controlled a lot of advertiser money since it had millions of advertisers that entrusted it with their campaigns through its search engine and ad network, it controlled most publisher ad space through its DoubleClick purchase, and it owned an exchange, AdX, which came with DoubleClick. It also had search data for most users, as well as DoubleClick’s vault of data, which gave the firm a God’s eye view over all user behavior.
Over the next ten years, Google tied all of these products together in a way meant to exclude rivals. If you wanted access to advertisers Google controlled you had to use DoubleClick publishing software and Google’s ad exchange. If you wanted access to Google’s ad inventory or data, you had to use its ad software and exchange. And since all the pricing was opaque, Google could and did manipulate auctions to ensure that rivals delivered worse prices for publishers and ad buyers who used them.
The key to the online ad business in general is to have enough advertisers and advertising inventory to make an auction work. This shouldn’t be that big a deal, since there’s no reason you couldn’t let anyone with advertisers or ad inventory connect through exchanges, if it was all interoperable. That is in fact how the stock market functions, and as a result the brokerage fee for buying or selling stock is a tiny percentage of the price of the stock itself. But that’s not the case with online advertising. Google controls the brokerages on both sides, the exchange in the middle, the data, and the pricing. It manages where ad money flows, and to whom.
This monopolization scheme worked. Google gained monopoly power in most areas of the ‘the adtech stack’ as it’s known, and according to its own internal analysis, took 35 cents out of every dollar spent on advertising.
The Antitrust Division included this chart in their complaint, which lays out the market shares in every layer of the industry.
There were challenges over the years to Google’s power. Rivals, such as AdMeld, would come up with new innovations, like yield management, which meant finding more efficient ways to manage ad inventory, or header bidding, which let publishers sell to more than one exchange. Google had a few responses. It bought competitors. It wrote contracts barring the use of rival services. And it manipulated the market to ensure it could offer better prices than its rivals, who would then go out of business. In some cases, Google had schemes set up to ensure that advertisers or publishers who worked with rivals incurred financial penalties for doing so.
To put it a different way, imagine if you wanted to buy a share of IBM stock, and could choose between two brokers. E-Trade offered IBM at $85 a share, while JP Morgan offered it at $50 a share. The reason for this pricing disparity is that JP Morgan owns the New York Stock Exchange and all the brokers selling IBM stock. All pricing data on IBM stock is secret, and can only be accessed by JP Morgan. In that case, you might prefer E-Trade’s service and user interface, and E-Trade might be a more efficient broker. But that wouldn’t matter, E-Trade simply wouldn't be a viable business. That’s what effectively happened in the adtech line of business.
Google’s monopolization scheme is quite profitable, but adtech is just 15% of Google’s revenue. So there’s a strategic reason as well for what Google is doing - it is protecting the other 85% of its business. Excluding others from adtech markets raises the barrier to entry for anyone trying to build a rival search engine or challenger to YouTube. To compete, not only would a rival search engine have to replicate the product itself, but it would have to build out a network of millions of advertisers to monetize it. We know this is the case, because Google actually gave Facebook preferential access to its adtech network, simply because Facebook had built a rival network of millions of advertisers, and was getting ready to let them buy on more than just Facebook through what became known as the Facebook Audience Network. (Now FAN mostly just buys through Google’s system.)
So that’s the case. It’s about the tens of billions of dollars that flow from advertisers to publishers, and Google as the intermediary with very sticky fingers. More than that, the stakes for Google are increasingly serious. It is now facing so many antitrust claims that it has to win them all to maintain its existing business model. If Google loses this case, then that’s not only billions of dollars that will flow back to our newspapers and publishers, but it’s a precedent for breaking up a dominant tech firm. If Google wins, well, it has to win four other cases against the government, as well as anything else filed by private litigants. Increasingly, that’s a tall order.
The GOP as the Party of Big Tech?
Alas, it’s not all good news. On Friday, Bloomberg’s Emily Birnbaum confirmed some bad news about the Republican Party.
Buck was the key anti-monopolist on the House Antitrust Subcommittee, and he lost a major battle with libertarian Jim Jordan and House Speaker Kevin McCarthy over whether the GOP will do anything on antitrust vis-a-vis big tech. There’s a shot that there will be some action in other committees around app stores, but the antitrust story for the coming House of Representatives is an ugly one.
Since Ronald Reagan, and arguably going back to the 1930s, the GOP has been considered the party of big business, mostly seeking to help dominant firms cement their market power, and often facilitating global trading arrangements benefitting those corporations. The GOP appealed to college educated workers, and upper income voters. But Donald Trump disrupted that brand, challenging U.S. integration with China, and bringing forth unorthodox policies, like the first Federal antitrust case against Google, in 2020.
Would the GOP transform into a party that sought to appeal to working class voters? Many politicians, like Marco Rubio and Josh Hawley thought it would, and could. Writer Michael Lind argued that it was more likely conservatives would move left on economic questions than it was that liberals would move to center on cultural ones. New think tanks, like Oren Cass’s American Compass, and new magazines like American Affairs, provided some intellectual heft to what became known as the “Realignment Project.”
But since Trump left office, the GOP has turned away from its nascent skepticism of big business. There’s some residual anger towards business on the right based on cultural concerns, but it’s a very narrow view of culture. Live Nation/Ticketmaster, for instance, is a cultural gatekeeper, but since ticketing monopolies don’t have anything to do with pronouns, it mostly escapes the notice of the populist right at this point. Meanwhile, serious policymakers, like Buck, are losing influence.
I don’t think this loss is permanent. There are a number of important Republican Senators who want action against monopolies. More importantly, Democrats are getting more aggressive on populism, and are likely to try and steal voters motivated by economically populist concerns. That’ll put pressure on the right. In addition, most younger conservatives simply don’t buy the libertarian arguments anymore. But the loss is undeniable and ugly, at least in the short-term. It’s not a particularly surprising outcome, but it’s a sad one.
Still, it’s a good week. Two steps forward, one step back.
The Rage of Jim Cramer
I watch CNBC almost every day, because it’s useful to track what Wall Street analysts and various investors like to say publicly about what is happening in the world. Increasingly, I’ve noticed concern about antitrust action. Mergers are harder to get through, and CEOs are complaining about the possibility they may face antitrust action for certain pricing strategies of business methods. CNBC covered the non-compete ban in detail, and then the Ticketmaster hearing.
Jim Cramer is the star of CNBC, and has been making snide comments about Lina Khan for the past year or so. But the Google case, I think, was a sort of breaking point.
Cramer talks to a lot of CEOs, and generally puts out an exaggerated sense of what they think. “There is no doubt this is a concern for CEOs,” said Cramer’s fellow anchor, CNBC’s David Faber, about Lina Khan. At this point, though no one will say it publicly, the fear in the board room is palpable.
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I think it is rather telling that GOP leadership has spent more time and effort fighting populists than they have Democrats.
What's interesting about 2005 is that at Google, at least their recruiters had the story that the big competitor was Microsoft, or at least that's what I was told unofficially on a call. I flew out, but subsequently didn't get that job. So this internal transition might not have been the line given to tech workers at the time, even though it represented a complete remake of the company.