By Jeffrey Shinder and Evan Schultz
Antitrust enforcement is not going mobile... at least, not yet.
On Friday, the Federal Trade Commission decided not to challenge Google’s attempt to acquire AdMob, which places electronic advertisements on cell phones and other mobile devices. Even though it ultimately declined to challenge the deal, the FTC’s sustained interest in this transaction was understandable, given the increasing importance of mobile advertising. While the market is still relatively small, as Google itself notes “the prospects for this space are excellent.” And the FTC has emphasized that it is going to keep an eye on Google (and probably Apple, too) in large part because it apparently has concluded that a “market” for mobile Internet ads does exist. Since one’s view of the market often drives where one comes out in antitrust analysis, the FTC’s apparent recognition of a mobile advertising market could be critical going forward.
Is Mobile Advertising a Market?
To understand what is at stake here, it helps to start with how Google has tried to explain its proposed acquisition of AdMob. Google (goog) has put together a graphic that illustrates both the possible need for antitrust enforcement, and also the problems in doing so. The graphic shows four mobile phones, each displaying advertisements. The first image shows a phone with an ad embedded in a text message. The second shows a search being conducted on Google’s search engine, with ads displayed in the mix. The third shows a phone browsing to a stripped down mobile web page, complete with a small advertisement. And the fourth phone shows a card game being played from within a software application on the phone, with the top portion of the game offering up an advertisement. These four types of advertisements constitute the fighting ground: short message service (SMS) text ads, mobile search ads, mobile web page ads, and application ads. According to Google, it doesn’t compete in the SMS market, it does focus on mobile search ads, and AdMob focuses on mobile display ads and on application display ads.
Unlike the FTC, Google is careful not to call any of this a market. To the contrary, it splits up mobile advertising into the four areas represented by the four phones, refers to mobile advertising as “very fragmented,” and calls the mobile world a “space” rather than a market. But the fact remains, even Google acknowledges that there is something new and unique about mobile advertising, and it wants to increase its business there.
Another way to examine whether mobile advertising makes up a market is to take a look at the advertising world more generally. According to Google, in 2009, advertisers spent $51 billion on television ads, $38 billion on newspaper ads, $24 billion on online advertising, and $416 million on mobile ads. Not surprisingly, Google claims that mobile advertising is too small a segment to merit any regulatory intervention – just four-tenths of a percent of all ad spending in 2009. One could theoretically argue that all forms of advertising, or at least all e-advertising, should be in the market.
But that conclusion might ignore some unique attributes of mobile advertising. Users of smartphones, and especially those who use their mobile devices to browse the web, may make up a demographic of special interest to advertisers: young users who buy many things, or wealthy ones who buy expensive things. Also, mobile devices are in one way quite distinct from laptop or desktop computers: people and their cell phones are quite literally joined at the hip. When people are away from their homes and offices, the only way they can browse the web is on a mobile device. For those people, at those times, the only way to pitch products on a computer is through mobile advertising. Perhaps most importantly, mobile platforms enable targeted forms of advertising that will vastly increase the efficiency of advertising, perhaps even more than the efficiencies of e-advertising. At the end of the day, the question comes down to this: is mobile advertising so unique that a hypothetical monopolist’s profitability can raise prices without causing enough customers to switch to alternative advertising? If it is, then the FTC is correct that mobile advertising is a market.
Will Google/AdMob Pose Any Risk to Competition?
But as the FTC recognized, even if a market for mobile advertising does indeed exist, that does not necessarily mean that there was reason to block Google’s acquisition of AdMob. The FTC would still have needed to show that the merger might substantially lessen competition. According to the FTC, the “decision was a difficult one.” That’s because Google might extend its power with the acquisition. Specifically, Google’s dominance in search gives it an ever increasing ability, through the algorithms it uses, to provide targeted and highly efficient advertising to advertisers. Like all industries that are prone to network effects, the value of Google’s platform increases exponentially as more and more consumers and advertisers use it. Significantly, Google refines its formulas through experience. As a result, the more advertisements it places, the more feedback it gets from people browsing the web, and the better able it is to refine its formulas to attract still more advertisers. Given this positive-feedback dynamic, which has entrenched Google’s dominance in search, Google’s decision to buy AdMob’s strong mobile advertising network might well give it the ability to lessen competition in the mobile advertising market, assuming, of course, that such a market exists.
At the same time, the FTC acknowledged that, whatever Google’s strength in the market, it likely will have a powerful counterweight in Apple (aapl). Specifically, the FTC noted the importance of Apple’s acquisition of another mobile advertiser, Quattro, and Apple’s subsequent announcement that it is entering the mobile advertising market through its own program, called iAd. Depending on which measurement one examines, Apple might be a big player, a strong competitor, or a dominating leader. Looking at the cell phone market generally, Apple's phones make up little more than a rounding error: about 2.5 percent of the worldwide market. Looking only at the world of smartphones (those that have features for email, web browsing, and other applications), Apple does much better: in 2009, it held just over 14 percent of the market. But it is not the market leader in operating systems of smartphones; it falls behind the manufacturers of Nokia and Blackberry devices. That said, when it comes to actually browsing the web on mobile devices, Apple is number one in the smartphone market: in February of 2010, Apple mobile devices browsed a full 50 percent of the web sites tracked by AdMob. Given these statistics, Apple’s iAd program, which will likely dominate all advertisements on iPhone applications, might be seen as nothing more than a drop in the bucket of cellphone advertising. Or, iAd might be seen as way for Apple to use its leading position in mobile web browsing to control mobile advertising more generally. The fact that Apple may be selling its iAd advertisements for millions of dollars, instead of the hundreds of thousands that advertisers pay elsewhere, also might indicate that Apple could be the one with market power, not Google.
Clearly, then, Google/AdMob likely will be competing with Apple and that prospect made it very difficult for the FTC to move against the Google/AdMob deal. The FTC may also have been chilled by the fact that Google also will be competing with many other operations: Apploop, Bango (BGO), Smaato, Approlix, Adfonic, Millenial Media, JumpTap, PurpleTalk, Greystripe, Medialets, InMobi, MobGold, uLocate, 4INFO and, potentially, Microsoft (msft) and Yahoo (yhoo). But having competitors is not the same as having real competition. After all, Apple’s iAd will likely focus on placing advertisements in applications, which is only part of the space in which AdMob competes. It’s unclear whether iAd will expand to also place advertisements on non-Apple mobile devices. Nor is it clear that Apple’s share in smartphones will be large enough to discipline Google’s conduct, particularly if Google’s Droid platform continues to show strong growth. If that happens, Google and AdMob may well emerge as a powerhouse if Google successfully leverages its dominance in search to gain an advantage in mobile advertising. Tellingly, if one looks at ad clicks, as opposed to revenues, to gauge market share – AdMob, by one account, already has 61% of the mobile advertising “market”, a potentially dominant share that Google will set out to increase.
The combination of the fluidity of mobile advertising and Apple’s presence enabled the Google/AdMob merger to proceed without intervention by the FTC. But, mobile advertising is prone to powerful network effects which could propel Google to a dominant position in the industry. If that happens, the FTC’s apparent willingness to define a narrow mobile advertising market could presage future antitrust enforcement against Google (or Apple) down the road.
Jeffrey I. Shinder is the Managing Partner of Constantine Cannon LLP’s New York Office. Evan Schultz is an associate at Constantine Cannon LLP.