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Tell me if I've got this right: Say you have some businesses in industry X that all rely on advertising. Say one of those businesses also happens to own the d

by natch 9y ago

Tell me if I've got this right: Say you have some businesses in industry X that all rely on advertising. Say one of those businesses also happens to own the dominant advertising platform that businesses in industry X need to use, in order to effectively find customers. (Special note for those subset of HN readers who tend not to read: Yes there may be other platforms, but before you present that as an objection, note I just said let's say they need to use this one in order to effectively find customers.) In this setup, the business that owns the advertising platform has an advantage over all other businesses in industry X, because it pays itself advertising revenue, where the other companies have to pay their competitor. So money is always being siphoned off to pay the advertising platform, with a cost to most businesses but a (near) zero cost to the business owning the platform. We can assume the platform is already paid for out of profits made from advertisers in industries A, B, C, X, Y, and Z. It seems to me this is a fundamentally rigged game (rigged in fact, not necessarily by intent) in which all other things being equal, the owner of the advertising platform always has the upper hand. Even if the bidding process is made "fair."

benchaney 9y ago
You are assuming that running and advertising business is profitable. If this is the case then yes, running an advertising business plus X always gives you an advantage over just doing X. This is true no matter what X is, even if X is unrelated to advertising, or even just doing nothing. I’m not sure in what sense this means that the game is rigged (unless of course the bidding process is unfair).
- admax88q 9y ago
  I think you missed the point, it's not that doing two profitable things is better than one, which you're right is always the case. It's the more specific case of running businesses X and Y where X is dependent upon buying services that Y provides. If you have a monopoly on Y (advertising), then it's easier to complete in X, because everyone else in X has to buy their Y services from you. So you end up paying your competitor in order to compete with them.
  - benchaney 9y ago
    I'm not sure that I did. If you are trying to compete in business X, you have a side income Z, and everyone competing in X has to buy service Y, what tangible benefit do you get from Y and Z being the same thing? Unless you can rig the bidding process I don't see any advantage.
    - admax88q 9y ago
      It means that any expense you spend on Y isn't really an expense, since the money goes right back into your pocket. So not only do you get the extra income from other people buying Y, buy you can operate at higher margins than everyone else in X because Y is available to you at cost. EDIT: On further thought it seems no different than being vertically integrated.
      - benchaney 9y ago
        > It means that any expense you spend on Y isn't really an expense, since the money goes right back into your pocket. If you do the accounting in this way, then you make that much less profit on your service, so it winds up being the same as if you are making a greater profit, but count the cost of Y at market value. > So not only do you get the extra income from other people buying Y, buy you can operate at higher margins than everyone else in X because Y is available to you at cost. This isn't any different than if Y and Z are different, but you use the excess profits from Z to subsidize your business in X.
        xstartup 9y ago
        That's not how auctions work. Let's say A owns advertising business X and shopping business Y. Now, if B who only owns shopping business Z will be paying their competitors. If A bids higher, money still flows black to them regardless of the profit/loss. But Z is forced to bid much higher to get any traffic! This can be used to inflate the price to any level. Sure, others can also inflate the prices but if you try that then the money goes to A and you lose that money but it's not true for A. In this Google operates like A. Edit: Google has lot more data about a visitor and which enables them to predict more. So, they can sell their competitors (in shopping business) the impressions which never convert while selling the impressions which are highly likely to convert to their own shopping business.
- natch 9y ago
  Does it need to be profitable? It seems to me that if it siphons money off from competitors, that's already enough to hurt the competitors relative to itself. In fact not only does the advertising not need to be profitable, even the sales of X do not need to be profitable, for the competitors to be harmed... dumping would be the extreme example of that. You are talking about a different aspect of the scenario, where the company is reaping profits from advertising. Sure, that's kind of beside the point though. Which is why it's important to recognize that the harm happens even without the advertising being profitable.
  - benchaney 9y ago
    If the service isn't profitable, then you are subsidizing the cost of a service that your competitors need. You aren't benefiting from the fact that your competitors are spending money. They would have had to spent money anyway.
    - natch 9y ago
      Interesting... I started out pretty sure you were wrong about this but you and others are bringing me around. Good discussion.
  - deecewan 9y ago
    Its not really siphoning money off, tho. It is an exchange of money for services rendered. From what I saw in comments and the (paywalled) article, the problem is that Google isn't siphoning money. They're keeping the ad-space for themselves.
rocqua 9y ago
It raises the question, why is Google in the comparison shopping business. Thinking about it, it makes sense for google though. Web scraping and data analysis is their forte. And it fits within google's approach of "answering any question someone has". If someone wants to know the cheapest place to get X, they just want someone to type X into google and get the best answer. For them it's not about making money on commission. Instead it's about getting buy-in into their ecosystem. Apparently they think they can provide a better experience than the commercial sites can.
- prepend 9y ago
  They are in the business of making companies pay for placement in the comparison shopping business. It seems obvious to me that this is just an artificial product to make more revenue. Froogle was actually better for results a decade ago when they just sorted the normal web scraping for shopping items. Adding the forced ads to show up resulted in worse deals for consumers. This was part because advertisers had t pay for ads, thus raising prices. And part because advertisers didn’t have the best products, just the most efficient ads.
  - dsacco 9y ago
    > It seems obvious to me that this is just an artificial product to make more revenue. If a product is actually generating more revenue, what makes it "artificial"? Do you disagree with the use of products to complement an ecosystem, or do you disagree with the use of products that are not intended to turn a profit on their own, like loss leaders?
    - prepend 9y ago
      Good point. Not artificial for Google as it makes money. I meant artificial for users as there is no need and it replaced a better product that made less revenue. For example, have a free water fountain and then replacing it with a coin operated water fountain that dispenses warm water is using artificial with my original intent. My main disagreement is in the use of verticialy integrated products that reduce consumer value but yield higher marginal value to the producer. I’m a huge fan of complementary products within an ecosystem that increase consumer value. I’m also fine with loss leaders, but again I prefer ones that lead to increased consumer value.
Ilverin 9y ago
I think this effect is small because of opportunity cost. In Case A, google wins the bid, they gain the ad space, but gain no revenue. In Case B, google does not win the bid, they lose the ad space, but do gain revenue. Revenue and ad space are mutually exclusive, each is the opportunity cost of the other. Yes, in both cases google wins, but that is because google is the reason the ad space exists in the first place.
- prepend 9y ago
  But since google auctions ads, Case A results in higher prices to the non-Google ad buyers. So it’s better than neutral.
- taneq 9y ago
  Google can 'print' as many ad spaces as they want, and buy back the ones that don't reach their minimum price.
  - aoeusnth1 9y ago
    .. and your objection to that is? I’m not following the logic of how Google’s camera comparison shopping business is unfairly more profitable just because it’s bolted onto an immensely profitable ad company.
    - taneq 9y ago
      The issue is that they're using their position as an advertising near-monopoly to choke out competitors' ability to advertise their products. The particular mechanism[1] is not the issue; using it to deprive competitors of the ability to advertise at reasonable prices is the issue. Imagine you're a car salesyard in a small town. You don't want your competitors to be able to advertise, so you buy the company that publishes the only newspaper in town. You don't want to be accused of being out-and-out anticompetitive, so you still let your rivals advertise, but you charge them $500 per car advertised. Is this OK? [1] Although this particular mechanism seems pretty dubious and may even qualify as "shill bidding", which is forbidden at other auction venues such as eBay: http://pages.ebay.com/help/policies/seller-Shill-bidding.html?rmvSB=true http://pages.ebay.com/help/policies/seller-Shill-bidding.htm...
ikeboy 9y ago
Oh noes my vertically integrated company can out compete competitors
stuffedBelly 9y ago
I wish the fiduciary rule can be applied more broadly other than just in the financial industry.
jayd16 9y ago
It just comes down to Google gets to pay cost for ads and everyone else has to pay market price. The important factor here is any profit that could have been made between cost and market price for those ads is lost to Google as well. At best, Google is just cheating revenue out of its ad division. I'm not sure this would actually be a huge advantage in the long run unless integration led to Google ads being cheaper to implemented than ads for others.
- aoeusnth1 9y ago
  Exactly. They pay cost for ads PLUS opportunity cost of selling the ads. If you assign the opportunity cost and revenue of selling the ad to the Ads department and the revenue of the camera business to the Shopping department, it seems obvious that it’s not unfair.
Eridrus 9y ago
The end result of this is that Google has more money than you, but this is true any time you are competing against a large company with more than one line of business.
savanaly 9y ago
>In this setup, the business that owns the advertising platform has an advantage over all other businesses in industry X, because it pays itself advertising revenue, where the other companies have to pay their competitor. So money is always being siphoned off to pay the advertising platform, with a cost to most businesses but a (near) zero cost to the business owning the platform. I don't think this is quite right. If I have a fixed quantity to sell (approximately true for advertising space on the web) then units I buy from myself cost me the same as they would cost other companies. Suppose I have $100, and 5 advertising spots worth $20 each. I have two options here: a) If I sell the spots to others then I have $100 + 5 * $20 = $200. b) If I "sell" the spots to myself (the other wing of my company that needs to advertise) I have $100 and whatever 5 advertising spots are worth. You are representing the situation of b as if it were "free advertising", thus giving my company an unfair advantage. But in fact, compared with situation a, it is clear I paid for the advertising, as I am up 5 spots and down $100 I could have obtained by selling the spots. So advertising's cost is not lower just because I also own the company that sells the advertising spots. If I'm better off than someone without advertising spots that's because advertising spots are worth something, not because of any purported shady synergy I get from owning both the advertising spots and the company that needs them.
- comex 9y ago
  But let’s say the spots are actually only worth $10, in terms of the ability to generate revenue. If you sell them to someone else for $20, you win because you get more money than the slots were worth. If you sell them to yourself for $20, you don’t lose any money and you can still make $10 (which is more than the slots originally cost you). However, Google claims it is not doing this: > As part of the change, Google said it would operate its shopping-ad service as if it were a profitable, standalone business to ensure doesn’t overbid for ads. Still, “profitable” could be by the slimmest of margins, and Google would still have a strong incentive to keep the “standalone” business going (that is, the profit to their other business), whereas an independent company wouldn’t.
  - daveFNbuck 9y ago
    If you sell them to yourself for $20, you have your original $100, plus the $10 * 5 dollars in ads, for a total of $150. Because $150 is less than $200, this means that diverting the ads to yourself loses you money.
tinymollusk 9y ago
This sounds approximately correct, and is a good perspective for an entrepreneurial forum. This is what investors call a moat. It's such an effective one that we have legislation designed to deal with it. This is not a comment on ethics or morality, it's simply one on strategic efficiency.
csomar 9y ago
It is not rigged. Google own the thing. It is not a public utility. If I put an ad, product, or something on my site do I need to care about you? nope. I only care about my own profit. Same should be going with Google. However, people assume things should happen in a different way because Google has become very popular? Many people scream "regulation" here. But look around: There is plenty of money in Tech and in funding, yet we have a single Google. I'm afraid regulation will kill and not innovate.

by natch 9y ago

benchaney 9y ago

You are assuming that running and advertising business is profitable. If this is the case then yes, running an advertising business plus X always gives you an advantage over just doing X. This is true no matter what X is, even if X is unrelated to advertising, or even just doing nothing. I’m not sure in what sense this means that the game is rigged (unless of course the bidding process is unfair).

admax88q 9y ago
I think you missed the point, it's not that doing two profitable things is better than one, which you're right is always the case. It's the more specific case of running businesses X and Y where X is dependent upon buying services that Y provides. If you have a monopoly on Y (advertising), then it's easier to complete in X, because everyone else in X has to buy their Y services from you. So you end up paying your competitor in order to compete with them.
- benchaney 9y ago
  I'm not sure that I did. If you are trying to compete in business X, you have a side income Z, and everyone competing in X has to buy service Y, what tangible benefit do you get from Y and Z being the same thing? Unless you can rig the bidding process I don't see any advantage.
  - admax88q 9y ago
    It means that any expense you spend on Y isn't really an expense, since the money goes right back into your pocket. So not only do you get the extra income from other people buying Y, buy you can operate at higher margins than everyone else in X because Y is available to you at cost. EDIT: On further thought it seems no different than being vertically integrated.
    - benchaney 9y ago
      > It means that any expense you spend on Y isn't really an expense, since the money goes right back into your pocket. If you do the accounting in this way, then you make that much less profit on your service, so it winds up being the same as if you are making a greater profit, but count the cost of Y at market value. > So not only do you get the extra income from other people buying Y, buy you can operate at higher margins than everyone else in X because Y is available to you at cost. This isn't any different than if Y and Z are different, but you use the excess profits from Z to subsidize your business in X.
      - xstartup 9y ago
        That's not how auctions work. Let's say A owns advertising business X and shopping business Y. Now, if B who only owns shopping business Z will be paying their competitors. If A bids higher, money still flows black to them regardless of the profit/loss. But Z is forced to bid much higher to get any traffic! This can be used to inflate the price to any level. Sure, others can also inflate the prices but if you try that then the money goes to A and you lose that money but it's not true for A. In this Google operates like A. Edit: Google has lot more data about a visitor and which enables them to predict more. So, they can sell their competitors (in shopping business) the impressions which never convert while selling the impressions which are highly likely to convert to their own shopping business.
natch 9y ago
Does it need to be profitable? It seems to me that if it siphons money off from competitors, that's already enough to hurt the competitors relative to itself. In fact not only does the advertising not need to be profitable, even the sales of X do not need to be profitable, for the competitors to be harmed... dumping would be the extreme example of that. You are talking about a different aspect of the scenario, where the company is reaping profits from advertising. Sure, that's kind of beside the point though. Which is why it's important to recognize that the harm happens even without the advertising being profitable.
- benchaney 9y ago
  If the service isn't profitable, then you are subsidizing the cost of a service that your competitors need. You aren't benefiting from the fact that your competitors are spending money. They would have had to spent money anyway.
  - natch 9y ago
    Interesting... I started out pretty sure you were wrong about this but you and others are bringing me around. Good discussion.
- deecewan 9y ago
  Its not really siphoning money off, tho. It is an exchange of money for services rendered. From what I saw in comments and the (paywalled) article, the problem is that Google isn't siphoning money. They're keeping the ad-space for themselves.

rocqua 9y ago

It raises the question, why is Google in the comparison shopping business. Thinking about it, it makes sense for google though. Web scraping and data analysis is their forte. And it fits within google's approach of "answering any question someone has". If someone wants to know the cheapest place to get X, they just want someone to type X into google and get the best answer. For them it's not about making money on commission. Instead it's about getting buy-in into their ecosystem. Apparently they think they can provide a better experience than the commercial sites can.

prepend 9y ago
They are in the business of making companies pay for placement in the comparison shopping business. It seems obvious to me that this is just an artificial product to make more revenue. Froogle was actually better for results a decade ago when they just sorted the normal web scraping for shopping items. Adding the forced ads to show up resulted in worse deals for consumers. This was part because advertisers had t pay for ads, thus raising prices. And part because advertisers didn’t have the best products, just the most efficient ads.
- dsacco 9y ago
  > It seems obvious to me that this is just an artificial product to make more revenue. If a product is actually generating more revenue, what makes it "artificial"? Do you disagree with the use of products to complement an ecosystem, or do you disagree with the use of products that are not intended to turn a profit on their own, like loss leaders?
  - prepend 9y ago
    Good point. Not artificial for Google as it makes money. I meant artificial for users as there is no need and it replaced a better product that made less revenue. For example, have a free water fountain and then replacing it with a coin operated water fountain that dispenses warm water is using artificial with my original intent. My main disagreement is in the use of verticialy integrated products that reduce consumer value but yield higher marginal value to the producer. I’m a huge fan of complementary products within an ecosystem that increase consumer value. I’m also fine with loss leaders, but again I prefer ones that lead to increased consumer value.

Ilverin 9y ago

I think this effect is small because of opportunity cost. In Case A, google wins the bid, they gain the ad space, but gain no revenue. In Case B, google does not win the bid, they lose the ad space, but do gain revenue. Revenue and ad space are mutually exclusive, each is the opportunity cost of the other. Yes, in both cases google wins, but that is because google is the reason the ad space exists in the first place.

prepend 9y ago
But since google auctions ads, Case A results in higher prices to the non-Google ad buyers. So it’s better than neutral.
taneq 9y ago
Google can 'print' as many ad spaces as they want, and buy back the ones that don't reach their minimum price.
- aoeusnth1 9y ago
  .. and your objection to that is? I’m not following the logic of how Google’s camera comparison shopping business is unfairly more profitable just because it’s bolted onto an immensely profitable ad company.
  - taneq 9y ago
    The issue is that they're using their position as an advertising near-monopoly to choke out competitors' ability to advertise their products. The particular mechanism[1] is not the issue; using it to deprive competitors of the ability to advertise at reasonable prices is the issue. Imagine you're a car salesyard in a small town. You don't want your competitors to be able to advertise, so you buy the company that publishes the only newspaper in town. You don't want to be accused of being out-and-out anticompetitive, so you still let your rivals advertise, but you charge them $500 per car advertised. Is this OK? [1] Although this particular mechanism seems pretty dubious and may even qualify as "shill bidding", which is forbidden at other auction venues such as eBay: http://pages.ebay.com/help/policies/seller-Shill-bidding.html?rmvSB=true http://pages.ebay.com/help/policies/seller-Shill-bidding.htm...

ikeboy 9y ago

Oh noes my vertically integrated company can out compete competitors

stuffedBelly 9y ago

I wish the fiduciary rule can be applied more broadly other than just in the financial industry.

jayd16 9y ago

It just comes down to Google gets to pay cost for ads and everyone else has to pay market price. The important factor here is any profit that could have been made between cost and market price for those ads is lost to Google as well. At best, Google is just cheating revenue out of its ad division. I'm not sure this would actually be a huge advantage in the long run unless integration led to Google ads being cheaper to implemented than ads for others.

aoeusnth1 9y ago
Exactly. They pay cost for ads PLUS opportunity cost of selling the ads. If you assign the opportunity cost and revenue of selling the ad to the Ads department and the revenue of the camera business to the Shopping department, it seems obvious that it’s not unfair.

Eridrus 9y ago

The end result of this is that Google has more money than you, but this is true any time you are competing against a large company with more than one line of business.

savanaly 9y ago

>In this setup, the business that owns the advertising platform has an advantage over all other businesses in industry X, because it pays itself advertising revenue, where the other companies have to pay their competitor. So money is always being siphoned off to pay the advertising platform, with a cost to most businesses but a (near) zero cost to the business owning the platform. I don't think this is quite right. If I have a fixed quantity to sell (approximately true for advertising space on the web) then units I buy from myself cost me the same as they would cost other companies. Suppose I have $100, and 5 advertising spots worth $20 each. I have two options here: a) If I sell the spots to others then I have $100 + 5 * $20 = $200. b) If I "sell" the spots to myself (the other wing of my company that needs to advertise) I have $100 and whatever 5 advertising spots are worth. You are representing the situation of b as if it were "free advertising", thus giving my company an unfair advantage. But in fact, compared with situation a, it is clear I paid for the advertising, as I am up 5 spots and down $100 I could have obtained by selling the spots. So advertising's cost is not lower just because I also own the company that sells the advertising spots. If I'm better off than someone without advertising spots that's because advertising spots are worth something, not because of any purported shady synergy I get from owning both the advertising spots and the company that needs them.

comex 9y ago
But let’s say the spots are actually only worth $10, in terms of the ability to generate revenue. If you sell them to someone else for $20, you win because you get more money than the slots were worth. If you sell them to yourself for $20, you don’t lose any money and you can still make $10 (which is more than the slots originally cost you). However, Google claims it is not doing this: > As part of the change, Google said it would operate its shopping-ad service as if it were a profitable, standalone business to ensure doesn’t overbid for ads. Still, “profitable” could be by the slimmest of margins, and Google would still have a strong incentive to keep the “standalone” business going (that is, the profit to their other business), whereas an independent company wouldn’t.
- daveFNbuck 9y ago
  If you sell them to yourself for $20, you have your original $100, plus the $10 * 5 dollars in ads, for a total of $150. Because $150 is less than $200, this means that diverting the ads to yourself loses you money.

tinymollusk 9y ago

This sounds approximately correct, and is a good perspective for an entrepreneurial forum. This is what investors call a moat. It's such an effective one that we have legislation designed to deal with it. This is not a comment on ethics or morality, it's simply one on strategic efficiency.

csomar 9y ago

It is not rigged. Google own the thing. It is not a public utility. If I put an ad, product, or something on my site do I need to care about you? nope. I only care about my own profit. Same should be going with Google. However, people assume things should happen in a different way because Google has become very popular? Many people scream "regulation" here. But look around: There is plenty of money in Tech and in funding, yet we have a single Google. I'm afraid regulation will kill and not innovate.