× Expand Mark Lennihan/AP Photo The same digital ad, on the same website, at the same time, has a different value depending on the consumer being targeted.

This article appears in the Summer 2019 issue of The American Prospect magazine. Subscribe here.

A rapid-fire series of announcements in June foreshadow an increase in antitrust scrutiny of the tech companies that shape our economy. Nancy Pelosi summed it up on Twitter: “The era of self-regulation is over.” The House Judiciary Committee has opened an investigation into competition in digital markets, while the Department of Justice and Federal Trade Commission have divided authority between themselves over Alphabet (Google), Amazon, Apple, and Facebook. The DOJ will oversee any antitrust investigation of Google and Apple, leaving Facebook and Amazon to the FTC. Google and Facebook are presumed to be the focus.

The momentum to do something has been building, and for good reason. Consumers get to search the internet and connect with friends for free. But the cost is surveillance—across the whole web. This surveillance has concentrated the powers of influence and persuasion in the hands of two companies, with the sanctity of our democracy as the price. Congress recently investigated Russia's use of Facebook advertising to influence our 2016 presidential election, and is currently investigating whether Google is partly to blame for the wholesale decline of news publishers in America.

Even this is not the whole story. With the companies' revenues a function of sucking up more and more of users' time, their game becomes one of addiction. This may be why, at the World Economic Forum at Davos last year, George Soros branded them as a “menace” to society, and Salesforce CEO Marc Benioff called on countries to regulate them like they do the tobacco companies.

But what exactly do we need to regulate or investigate from an antitrust perspective? We know Google and Facebook as “tech” companies that let consumers connect with their friends, find information, share photos, and get directions. In each of those product markets, Google and Facebook have high, persistent market shares. We should ask why. Have Google and Facebook been keeping competitors out by engaging in exclusionary conduct, as search competitors (like Yelp) have complained of?

But Google and Facebook don't only have dominant positions in search and social networking. They make almost all their revenues selling advertising (Google, 86 percent; Facebook, 99 percent), and they have crushed the competition along the way, becoming a veritable duopoly in another critical market—the digital advertising market.

Jointly, they control around 60 percent of the $129 billion that will be spent on digital advertising in the U.S. in 2019, according to a study by industry publication eMarketer. Even more indicative of their power is the fact that together they capture the vast majority of new dollars that enter the market.

The online ad market as a whole is growing (expected year-over-year growth of 20 percent), but growth is not a market trend. Outside of Google, Facebook, and a few others, the rest of the market, which includes thousands and thousands of independent news publishers (that depend on digital advertising as their primary source of revenue), will shrink by 11 percent.

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If we are going to start understanding what the competition concerns are in the digital advertising industry—and why these companies invariably cause consumers privacy-related harms—we need to understand how online advertising really works. We need to stretch our fluency with tech language, and better understand how and why, precisely, these companies have such persistently high margins that competition is currently unable to break through. We shouldn't let the complexity of advertising markets blindside us. Understanding the mechanics of these markets is also the key to enforcing existing antitrust laws.

How Digital Advertising Works

Advertising campaigns used to be planned and managed by media buyers—usually 22-year-old, newly graduated communications majors. If that media buyer needed to help a car manufacturer reach men looking to buy a car, she might place an ad in Car and Driver, or in the automotive section of the newspaper. Advertising used to be something you could place, count, then see in the front cover spread of a magazine.

But this is not digital advertising today. Digital advertising is automated, data-driven, and opaque in its mechanics. That 22-year-old communications major has had to make way for data scientists, mathematicians, and computer programmers who, behind the scenes, use statistics, calculus, and linear algebra to optimize advertising campaigns, by micro-targeting users and constantly tweaking algorithms.

Does that car manufacturer still want to reach men looking to buy a car? A data scientist may tell them the optimal target is a 39-year-old man, carrying on an extramarital affair, who's on the brink of divorce. They can model this hypothesis (and prove it works), and advertising companies like Google and Facebook can put that into execution, finding ways to home in and target those types of people online.

When you go to a website and load a page, in the milliseconds that it takes for that page to load, there are real-time auctions running in the background that determine which ads to load on your page. Almost all online ads are delivered in this way, where highly complex auction markets make their money by competing on who can better track users and invade their privacy more thoroughly.

The targeting begins the moment you as a reader visit any website. Typically, your IP address, your location, and the URL of the page you are on are swiped from your browser without your explicit knowledge, and shared with advertising companies that run these ad auctions. The goal, of course, is to build as specific a portrait about you as possible—by linking your device with your identity—and cookies are a common tool for doing so.

A “cookie” is a small text file that a site can install on your computer when you visit. The text file fingerprints your device with a unique identifier, or “cookie ID” (such as 12345qwert). If the website knows your real identity (for example, if you log on to the site with your real name), the company can link it to your cookie (here, 12345qwert) and begin to gain an advantage in determining which ads to load onto your page.

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For example, if you're on the hypothetical URL newspaper.com/how-to-fight-melanoma, this probably means you're reading an article about melanoma. Companies might use that information to make a prediction about whether you or someone you love may have cancer. And they most certainly use that info to determine which ads to load onto your page.

The prices that any company is able to fetch for its ads depend on two crucial factors: the ability to identify who is loading the page, and the ability to then connect the user’s identity with more information about the user.

Imagine a person visits espn.com to read an article about the upcoming Super Bowl. Assume first he doesn't log on to the site, and blocks his browser cookies, so maybe the website he is visiting can't know who he really is. An advertiser can nonetheless bid on the opportunity to display an ad to this anonymous reader. Maybe the slot goes to a beer brand that wants to generally reach people who like football. Perhaps the going price is a $2 CPM (cost per thousand) and the ad gets sold at this price (meaning, this is the clearing auction price).

But you're not usually anonymous when you're online, even when you think you are. Again, advertising companies might know your identity because you log in, or because you are using a browser that allows tracking. Now it's not simply an anonymous person loading a page about the Super Bowl, it's “Michael Greenberg,” of Wichita, Kansas.

Now, companies can combine Michael's identity with other commercially available datasets in real time. For example, they might stitch Michael's identity with the fact that he makes $1 million-plus per year, which means that they can match Michael with an ad for a private jet service instead of a Bud Lite. The private jet ad might sell at a $200 CPM as opposed to the $2 CPM beer ad targeted to an anonymous user.

“The exact same ad, on the same website, at the same time, could be worth vastly different amounts to two different buyers depending on how much they know about the consumer being targeted,” explains Ari Paparo, now founder and CEO of advertising company Beeswax and a former Google exec. “User data is everything.”

Advertisers gain an even better advantage when they're able to track what users do as they move from site to site, app to app, site to app, and vice versa, which is exactly how Facebook and Google operate (and exactly the type of information traditional publishers don't have).

If a company that sells online ads can know what their readers are reading on other sites, then they can target the users based on that information when the user returns to their own site. For example, say Michael visits CNBC’s website in the mornings and reads about the markets, but visits The New York Times in the evenings and only reads the book review section. CNBCknows Michael is someone who follows the markets, and might monetize his view at a $30 CPM. The Times knows that Michael is someone who likes to read books so might only monetize Michael at a $10 CPM. If the Timescan somehow find out that Michael is reading CNBC in the mornings, then when Michael visits the Times book section in the evening, the Times can target him as someone who follows the markets and monetize him at $30, too.

Would CNBC want to share with the Times what Michael reads on cnbc.com? Of course not. The two are competitors on the advertising side of the market. If CNBC is selling its audience of financial readers at a cost of $30, and the Times can copy CNBC’s readers and their reading patterns, then the Times could theoretically undercut CNBC and sell ads targeted to CNBC financial readers for, say, $20 instead of $30.

But publishers like the Times and CNBC have no choice but to share this information with Facebook and Google. How, might you ask, does Facebook currently get this data from news publishers that are also advertising competitors? Well, Facebook has a number of derivative products that flow from the social network, including “Like” buttons and log-in tools. Facebook licenses Like buttons to publishers so that their readers can “like” and then “share” news stories across the Facebook social network. But Facebook now conditions these licenses on the ability to track publishers’ readers, whether the readers click the Like buttons or not, and Facebook can now use publishers’ reader data to sell its own ads.

Google, which now tracks users on over 70 percent of the top one million sites, also uses its ability to track users across the internet to extract an advantage in advertising markets. Google tracks users via its analytics and ad-serving products, which Google consolidated and rebranded last summer as the Google Marketing Platform. Google was actually the first of the two companies to consolidate products under a rubric of privacy.

The implication of all this is that the money that Google and Facebook can make selling advertising goes well beyond what other ad sellers can demand in the market. The Big Tech duopoly can track billions of users across millions of sites and mobile apps, creating longitudinal profiles on users. News publishers simply cannot compete with that kind of an informational advantage.

But there is another thing going on in these markets that explains the duopoly in the advertising market. When most people think about Google and Facebook, they think the companies make so much money by selling ads on their own properties—Google search, Gmail, the Facebook social network, Instagram, and so on. This is partly true. Google and Facebook also run auctions through which publishers now sell their own advertising.

Unlike in finance, there are several auction markets where digital ads trade. Anyone can create one. But Google and Facebook make sure their own advertising inventory (YouTube, Facebook) can only be bought through their own, proprietary auctions. Google made almost $20 billion last year from selling other companies’ ads. This is why Google today is the largest seller of advertising, globally, period.

What Can Be Done

If we review the history of these markets, and how they evolved, we see how this was not always the case. Think back to 2004, when the social network Facebook entered the market as a privacy-centered alternative to MySpace.

“We do not and will not use cookies to collect private information from any user,”the company’s privacy policy of that era proudly assured its fledgling community of college students. For ten years, competition in the social-network market constrained Facebook’s ability to surveil users across the sites of other news publishers to juice Facebook’s internal ad targeting. For example, when Facebook tried to start tracking users outside of Facebook itself in 2007, consumers pushed back strongly, and Facebook retreated.

It was competition that held Facebook back and protected the privacy of both users and news publishers. Even in 2007, MySpace still had twice as many users as Facebook. And it wasn’t just Facebook that was mindful of user privacy in a competitive market. Reflecting on how this dynamic similarly constrained MySpace in 2007, an industry analyst commented to CNNMoney: “News Corp. and Fox [which purchased MySpace in 2005] recognize the importance of allowing people to be alone with their friends so they do not feel like they are being looked at by Big Brother. They understand how many competitors they have nipping at their heels right now, so they are doing everything they can not to alienate their users.”

But after other social networks folded, Facebook's power grew. In June of 2014, Google announced it would pull its social network competitor Orkut from the market, and that same month, Facebook announced it would start tracking users on millions of other sites and apps, including news sites.

It was at this moment that for Facebook, the monopoly began and consumer privacy took a precipitous decline.

This history is why I made the case in an academic article earlier this year that Facebook’s antitrust fact patterns here have everything to do with privacy. And their monopoly power doesn’t just hurt consumers from a privacy perspective, it hurts competitors in digital ad markets too.

What are publishers to do? They need to access this era's only major social network to distribute their content. There are no competitive social networks of any scale that offer better terms.

Google and Facebook are rolling out new initiatives to seem better about privacy, but often these are simply smoke screens using the new language of “tech” to actively obscure and distract from what they are really doing and how they really make their money.

Take Mark Zuckerberg's announcement in March that Facebook’s new focus would be to build a “privacy-focused messaging and social networking platform.” The word “privacy” appears 22 times in Zuckerberg’s 3,000-plus word post. We are led to believe Facebook’s future is about privacy because it will encrypt more messages that consumers send to each other. But the encryption of conversations is a distraction. Facebook still uses the metadata of those communications (whom you called, when, from what location) to track and target consumers for advertising purposes. If we are concerned about reining in Facebook’s power to influence, encrypting messages doesn’t do that.

The language of distraction can also push through a merger. When Facebook made their case to regulators to approve the Instagram acquisition, they said Instagram was not a competitor, it was a photo-sharing site for smartphones (even though internally Facebook was talking about acquiring Instagram to eliminate competition). “It takes years of education to reach a conclusion this absurd; every teenager knew that Instagram was taking users from Facebook,” says Tim Wu, a frequent critic of tech monopolies and author of The Curse of Bigness. But the strategy of distracting to gain advantage is working.

The advertising industry has gone through a cataclysmic technological metamorphosis, and it is not just older politicians who are struggling to keep up with the change. Some of the biggest players at the brute end of this are the advertising holding companies, the big four publicly traded conglomerates that own advertising agencies globally, and control the marketing budgets of the largest brands in the world. They include my former employer WPP, and Publicis, IPG, and Omnicom, and they control the decisioning and budgets of the likes of the U.S. Army, Ford, Daimler AG, Volkswagen, Mars, and countless others. Internally, these companies have to grapple with finding new relevant talent, and re-educating their workforce. Over the last two years, we've seen significant declines in their market caps.

The upstart companies in Silicon Valley have found their competitive advantage usurping the privacy of a citizenry at large, and the benefits of this usurpation funnel to a small tech elite based on the coasts. While consumers benefit from these “free” products, there are questions about the structure of these new economies. Facebook and Google are incentivized to make their platform as addictive as possible, so they can gather more data, and sell more ads. The average American now spends almost an hour per day on Facebook properties. But the U.S. economy also struggles with productivity declines and wage stagnation.

One way to unhook Facebook and Google's business model over the public at large is through more competition. That's why antitrust has been the focus of conversation in the U.S. and across the globe. Consumers can pay for ad-free video subscription services like Spotify Premium or Hulu—why can't they in search or social networking? Why are these markets stuck? An antitrust investigation or lawsuit could result in a specific order, with Google and Facebook being rendered unable to track consumers across the web without their opt-in consent. Such an antitrust remedy could rein in Google and Facebook's power in digital advertising markets far more quickly and drastically than could breakup alone.

Legislation could separately deal with the privacy problem. Senator Josh Hawley has proposed a “Do Not Track” list that would prevent companies like Google and Facebook from tracking an individual’s online activities, and from creating profiles of those individuals from various datasets. Users who opt in to the Do Not Track list could not be discriminated against with diminished services from the platforms.

Once we lift the hood on how Google and Facebook make money, and better understand how digital advertising markets tick, the competition issues that need to be examined under antitrust law become clear. When the FTC cleared Google's acquisition of DoubleClick in 2007, the FTC largely brushed off privacy issues on the grounds that competition policy was not the right place for privacy concerns. But if we understand that user identity and user data are drivers of ad pricing, and that the terms that Google and Facebook are able to extract from independent publishers drive the health of the wider news ecosystem, it is impossible to continue to make this argument today.