REVEALED: ‘Secret deal’ between Google and Facebook to control advertising online

Facebook in 2017 planned to test an innovative way of selling online advertising that would threaten Google's control of the digital ad market.

Then less than two years later, Facebook reversed course and announced its joining of an alliance of companies that backed similar efforts by Google.

Facebook never explained why the company pulled out of its own project, but evidence presented in an antitrust lawsuit filed by 10 state attorneys general last month indicates that Google offered a sweetheart deal to Facebook—its closest rival for digital advertising dollars—to become partners.

Details of the agreement—based on court documents that the Texas attorney general's office reportedly uncovered as part of the multistate suit—were redacted in the complaint filed in Texas federal district court last month.

However, the paper trail was not hidden in the complaint's drafted version reviewed by The New York Times.

Executives at six of the more than 20 partners in the alliance told The Times that their agreements with Google did not include many of the same generous terms that Facebook received, alleging that the search giant handed Facebook an unfair advantage over the rest of them.

The executives—speaking on conditions of anonymity to avoid jeopardizing their business relationships with Google—were not aware that Google had afforded such advantages to Facebook. The disparity in treatments was not reported prior to the revelation.

The disclosure of the deal between the tech giants renewed concerns about how the Big Tech band together to back door competition. The deals are define the winners and losers in various markets for technology services and products, agreed upon in private with the terms hidden through confidentiality clauses.

Google and Facebook argued that such deals were common in the digital advertising industry, positioning that they did not thwart competition.

Google spokeswoman Julie Tarallo McAlister told The Times that the complaint "misrepresents this agreement, as it does many other aspects of our ad tech business." McAlister added that Facebook is one of many companies that participate in the Google-led program, noting that Facebook partners in similar alliances with other companies.

Facebook spokesman Christopher Sgro suggested that such deals "help increase competition in ad auctions," which benefits advertisers and publishers. "Any suggestion that these types of agreements harm competition is baseless," Sgro rebutted. Google and Facebook declined to elaborate on the specifics of their deal.

The Wall Street Journal reported on aspects of the draft complaint as early as Dec. 29, shining public light on the ad deal at the heart of an illegal price-fixing lawsuit.

Ten Republican attorneys general alleged that Google gifted Facebook special terms and access to its ad server, a ubiquitous tool for allocating advertising space across the web. This conduct by Google harms competition and deprives "advertisers, publishers and consumers of improved quality, greater transparency, increased output and/or lower prices," the final lawsuit argues.

Crucial to the backdrop of the Google-Facebook deal was the advertising industry’s movement toward an ad-sales method called header bidding, which helped website publishers circumvent Google's exchange for buying and selling ads across the web and directly solicit bids from multiple ad exchanges at once—leading to more favorable prices for publishers.

By 2016, about 70% of major publishers used the tool as Google, the middleman, worried that Facebook Audience Network (FAN) ad service might embrace header bidding, cracking Google's profitable monopoly over ad tools.

"Need to fight off the existential threat posed by header bidding and FAN," Google advertising executive Chris LaSala wrote in an internal document outlining 2017 priorities, according to the draft complaint.

In March 2017, Facebook endorsed header bidding. Then Google approached Facebook and the two reached their digital advertisement agreement in September 2018 code-named "Jedi Blue." A month later in December 2018, Facebook joined an advertising program, "Open Bidding," that Google offers as an alternative to header bidding.

According to the recent unredacted draft of the lawsuit obtained by The Wall Street Journal, the alleged stipulations in the Google-Facebook "Jedi Blue" contract required Facebook to pay Google 5% to 10% on each transaction—separate from an exchange fee—and barred Facebook from disclosing the pricing terms. The Google spokeswoman argued that this margin is the standard fee in the open bidding advertising program.

Facebook also had 300 millisecond "timeout" to recognize user and bid while several other participants had shorter 160 millisecond timeout. Google vowed to not use data related to Facebook's bidding history—known as bid response data—to influence pricing, "reverse engineer" Facebook's strategies, or "adjust or otherwise influence in real-time the bid response of another bidder (including Google)."

During the negotiations, Facebook vice president Dan Rose emailed CEO Mark Zuckerberg to clarify how the company sought such provisions "so that Google is no longer able to advantage their own demand," which would creating "a level playing field." The final version redacts the email and contract excerpts.

While both Facebook and Google said that the deal is not an antitrust matter, the clause included in the agreement requires the parties to "cooperate and assist" each other if they are investigated for competition concerns over the partnership. "The word 'antitrust'’ is mentioned no less than 20 times" throughout the agreement, the draft complaint reads.

The swell of recent antitrust cases filed against Google and Facebook has cast an apprehensive spotlight on lucrative deals among Internet oligarchs. In October, the Department of Justice sued Google and homed in on an agreement with Apple to feature Google as the pre-selected search engine on iPhones and other devices. Google claims that suit lacks merit.