What if… Google parts ways with its ad stack?

Last week, it was reported the DoJ will reject an earlier reported offer from Google’s parent company to partition elements of its ad tech business (in response to separate antitrust challenges in the U.S.) and then house them as standalone units within Alphabet.

The initial reports cited unnamed sources but denouncements from prominent industry voices were quickly made public (see below) but before delving any further it’s worth revisiting some of the grievances those in the ad industry have against Google.

I'm on the road, so quickly:

No bone here — no structural separations and no ethical walls separating business units. We have experience with the same remedies in other exchange markets. They fall short and 100% certain to fail–why Google offers them. https://t.co/PfUmPkdllW

— Dina Srinivasan (@DinaSrinivasan) July 8, 2022

Over the last decade, digital advertising has come to account for the single-biggest channel for advertisers to invest media budgets with Google easily the largest player in that field. And you don’t scale such heady heights without putting some noses out of joint on the way.

Ana Milicevic, co-founder of consultancy Sparrow Advisers, described the early-to-mid 2010s as the “wild west era” of ad tech, characterizing it as one of rapid adoption of such technologies but little actual knowledge of how they operate. She also asserted that it was during this era that Google capitalized on its multi-billion dollar spending spree in the preceding decade (most notably its $3.1 billion purchase DoubleClick) to become the most powerful outfit in media.

In parallel to this gold rush, government authorities scrutinized the marketing industry’s use of personal user data (not to mention Google’s growing dominance) resulting in laws such as the EU’s General Data Protection Regulations.

As the best-resourced company in the sector, these were developments Google foresaw and made moves to (as it interpreted at the time) prevent any subsequent blowback, changes that prompted chagrin among peers.

Google grievances

For instance, in 2015, Google introduced a policy meaning advertising inventory on YouTube could only be bought via its own ad tech tools at the expense of rival demand-side platforms.

In fact, veteran execs from (then) contemporary rivals such as AppNexus and TubeMogul cite this move as the death knell for realistic hopes of them competing with Google.

Interestingly, Google recently offered to reverse this decision as an olive branch to EU competition authorities, according to reports, with regulators there yet to respond.

Similarly, Google has been accused of attempting to thwart the rise of header bidding, an industry-wide effort to counter the dominance Google’s AdX enjoys over publisher inventory via way of the ubiquity of its publisher-side ad server, an offering popularly known as DoubleClick for Publishers, or DFP.

Google has been at pains to highlight its support of header bidding in Google Ad Manager in recent months. Although, the public emergence of hush-hush deals with Facebook to encourage it to shelve its own plans for header bidding via an arrangement known as ‘Project Bernanke’ — charges it denies — also caused rancor.

Additionally, as GDPR enforcement was introduced in 2018, Google implemented data rollbacks in its buy-side ad server, a measure that blunted rival ad tech vendors’ ability to pitch attribution tools to marketers. For some, this was further evidence of Google using privacy requirements to feather its own nest with its proposed changes to its Chrome web browser now in line for such criticisms as well.

Such concerns have mounted to the extent that U.K. authorities were galvanized to win concessions from Google granting bodies such as the Competition Markets Authorities greater say over its Privacy Sandbox proposals.

Google has also pledged to roll out any policies agreed with the CMA globally but it is also worth noting that in an echo of U.S. antitrust charges, the U.K. body has since opened up its own investigation into charges that elements of Google’s ad stack are self-preferencing.

Wayne Blodwell, CEO of TPA Digital, told Digiday that many of his clients (typically marketers seeking greater transparency over how their budgets are spent online) have concerns.

“Anecdotally, what I hear is whenever you use Google tech, you tend to buy more media from Google,” he said. “You can argue why that’s good, and why that’s bad, as while it is a concern [among some marketers] generally it is easy [to execute with the entirety of the Google stack].”

So, what is it, and how much is it worth?

The complicated nature of Google’s multitiered ad stack and how the tools operate with one another, not to mention whether the separate elements are interoperable with rival vendors, make assessment difficult as does the nature of how Google breaks down its results.

According to its full-year 2021 earnings disclosure, Google’s total advertising revenues were $209.5 billion with its “network advertising revenues” — those generated by its AdMob, AdSense and Google Ad Manager tools, according to Alphabet — contributing $31.4 billion.

Tom Triscari, a programmatic economist at consultancy firm Lemonade Projects added that assets such as Google’s buy- and sell-side ad server tools, its supply-side offering AdX as well as its DSP DV 360 are also likely to be under investigation.

“There’s no breakdown of the actual numbers, so you have to model it out,” he said, further estimating this quartet of tools generated $8.1 billion in revenue during the opening quarter of this year. Factoring in subsequent growth estimates, Triscari further predicted that total revenue for the year would be in the region of $40 billion.

Who could even afford it?!

Using further modeling, Lemonade Project’s Triscari estimated the combined entities could be valued in the region of $100-$150 billion — a huge valuation that prompts as many questions as it offers answers — a number that prompted multiple sources to opine, “Who could afford it?!”

“Let’s just say you start a process and go to put all of them [AdX, both ad servers, and DV 360] on the market as separate parties,” theorized Triscari, adding that its DSP alone could be valued in the region of $10 billion. “Take DV 360, let’s you’ve got the next-largest DSP The Trade Desk [whose market cap is approximately $20 billion] as the highest bidder, could they even afford them?”

Although, Triscari noted that decoupling any element of Google’s ad stack from its core offering, such as search, could significantly undermine the value proposition of its ad server(s), DSP, or SSP. “What is the value of the thing if you don’t have access to the Google audience IDs … deterministic audiences [in Android, Gmail, search, and YouTube] are the connective tissue inside Google’s walled garden are what make it so valuable.”

Where do we go from here?

Sources consulted by Digiday universally claimed the prospect of Google parting ways with some of its assets is a near certainty, and that ad tech is a likely candidate given the typically low margins and privacy concerns associated with the space.

Offering to divest such assets would likely be a play to protect Google’s core search offering — search generated $39.6 billion of Alphabet’s $54.7 billion advertising revenues in Q1 2022 — a sector of the market where it is most dominant, according to Ian Whittaker, an equities research analyst at Liberty Sky Advisors.

For Sparrow Advisers’ Milicevic any such divestiture will likely be the result of Alphabet reaching a deal with U.S. authorities as opposed to a forced divestiture, especially when geopolitics are taken into account — consider the rise of players such as TikTok.

She added, “I think Google is pre-emptively making these suggestions as they know the U.S. system is heavily incentivized to reach a deal… Nobody wants to go to court or have a prolonged process, it’s kind of like, ‘Don’t shoot the American innovation goose now that we have actual competition from other countries.'”

Similarly, Terence Kawaja, CEO of investment bank LUMA Partners told Digiday that Alphabet may continue piecemeal negotiations by offering up individual parts of its empire, such as AdX, in a manner that could leave the potential retaining assets such as DV 360 or DFP on the table.

Spin-off or carve-out?

Although most sources believe that spinning off or carving out ad tech assets as a single entity is the only realistic outcome with a public listing of any such entity a likely prospect.

In recent years, private equity groups became habitual acquirers of ad tech but given the likely huge valuation(s) involved, even individual pieces of the Google advertising empire, never mind the whole thing, are likely too much for such players to handle.

Whittaker said, “Obviously, if it’s a standalone business, you’re getting rid of the synergies between Google and the spin-off, that will obviously have some effect on valuation but even at that level [$100 billion-plus], you’re not going to get PE firms interested.”

“They would not put such an amount of money in one deal, you’d even struggle to find a conglomerate that would move it forward, it’s more likely that you’ll have it as a standalone entity,” he added.

LUMA’s Kawaja concluded, “It has to be a carve-out where they spin it to existing shareholders but it would have its own management that would be separate from the corporate that is Google… That’s the only thing that makes sense, as even the largest PE firm wouldn’t have the wherewithal to accomplish that deal.”