Google's Ad Division Split Could Transform $500 Billion Industry

For the past two decades, Google has been constructing a formidable digital advertising system. If it were to be broken up, it would cause a huge disruption in the 500 billion dollar online-ad industry.

The U.S. government recently filed an antitrust lawsuit, and if they are successful, Alphabet Inc. GOOG 1.56% will be affected.

An internet company is in need of spinning off its technology for brokering ad deals across the web, which is estimated to be worth tens of billions of dollars, as reported by ad and media-industry professionals.

The sale of assets could be difficult, as the large tech and media companies that could afford such a transaction - from Microsoft Corporation to Comcast Corporation - may face their own antitrust issues, according to the executives. Some have suggested that a spinoff would be more likely, and the resulting enterprise could become a buyer in an ad-tech industry filled with small companies.

Dave Morgan, CEO of Simulmedia Inc., a marketing technology firm, emphasized that any business should be able to stand on its own and be more likely to acquire other companies than be acquired itself.

Breaking apart the Google ad system would provide publishers and advertisers with more options and the ability to go beyond the Google platform without risking any damage to their companies, according to some of the executives. Google did not respond to requests for comment.

The United States Department of Justice, headed by Attorney General Merrick Garland, has accused Google of exploiting its market dominance in the online advertisement industry. The Department has requested that Google divest itself of two of its most important components: its advertising server, which is used by publishers to offer ad space on their websites, and its ad exchange, which facilitates automated transactions between buyers and sellers in a matter of milliseconds as webpages are loading.

Due to the lengthy process of antitrust legal proceedings, it could be a number of years before a spinoff or sale of Google's ad business is completed, unless the company attempts to reach a settlement with the government. Alternatively, Google could win the case and keep its entire ad business.

Google has denied any wrongdoings and has characterized the lawsuit as an effort to "select winners and losers in the highly competitive advertising-technology sector." The company has employed a team of top-notch lawyers to battle the case.

Rajeev Goel, the co-founder and CEO of PubMatic Inc., a company that specializes in ad-tech, stated that the legal case against Google, along with other legal issues the tech giant is facing, is prompting potential customers to look into other options.

He noted that the case would be a lengthy process, but the effects of it would be felt quickly. PubMatic was identified in the government's lawsuit as a target of Google's supposedly anti-competitive behavior.

Google's ad server is the most widely used in the industry, with 90% of large publishers utilizing it. Additionally, its ad exchange has a majority market share, as reported by the government's complaint. To make things easier, Google has combined these tools into a single product called Google Ad Manager. This product, along with Google's mobile-ad and network businesses, generated $31.7 billion in revenue in 2021.

Several major tech and media corporations are making their way into the online-ad industry and could speed up their progress by investing in some of Google's systems.

Comcast, whose FreeWheel division is a major player in video-ad sales, may be interested in Google's assets, however, some executives are concerned about gaining approval from antitrust regulators, according to sources familiar with the situation.

In 2019, Microsoft acquired the ad-tech company Xandr, bolstering its digital-advertising portfolio which includes Bing, LinkedIn, and MSN. Amazon has been a major competitor in the market, taking away market share from Google and Facebook. Netflix, which recently introduced an ad-supported tier of its service, has partnered with Microsoft for the time being, but has expressed interest in developing its own ad technology in the future.

Neither Microsoft nor Netflix provided a response when asked for comment. Amazon and Comcast chose not to comment.

Major corporations are currently engaged in a number of disputes with regulators in Washington and Europe. Richard Kramer, the founder of Arete Research, an equity-research firm that specializes in the tech sector, commented that "the last thing Big Tech companies would want to do is open themselves up to DOJ regulators."

The ad-tech sector is highly competitive, with many companies vying with Google to broker ad deals. Index Exchange Inc., Magnite Inc. and OpenX Technologies Inc. are just a few of the firms that operate marketplaces similar to Google's AdX exchange.

Demand-side platforms, which are companies that provide tools to assist advertisers in acquiring ad space, may find Google's sell-side assets, such as the ad server and marketplace, attractive. The Trade Desk Inc., the most prominent independent ad company with buying tools, has a market capitalization of approximately $25 billion.

Industry executives noted that smaller players and private-equity firms would likely struggle to acquire the necessary funds to purchase Google's assets.

Terence Kawaja, the founder of LUMA Partners, an investment bank that specializes in digital-media and advertising, stated that Alphabet shareholders should benefit from a spinoff.

Ari Paparo, founder and CEO of Marketecture Media Inc. and a former Google ad executive, believes that separating Google Ad Manager from the rest of Google would likely be detrimental to the business.

The Justice Department's complaint highlighted the role of Google's tools in its market dominance. Publishers who use Google's ad server and exchange to sell their ad space are able to access the large amount of demand that comes from Google's ad-buying tools. A 2019 Wall Street Journal article provided an in-depth look at these connections.

Mr. Paparo warned that if the demand is not managed properly, the revenue could take a significant hit.

Justin Wohl, the chief revenue officer of Salon.com LLC, expressed that he is currently obligated to use Google's ad server to receive the 25% of his ad revenue that originates from Google's AdX. If the Google assets were to be divided, he would have the option to switch ad servers while still being able to sell in Google's ad exchange.