Google's making an important change to its ad business

Regulators are forcing changes in France, and more could be on the way around the world.

| More on:
skate board with the google logo

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary Google has agreed to pay French regulators 220 million euros as part of a settlement in an antitrust case.

The 220 million euros -- about $268 million -- is just a slap on the wrist for the advertising giant, which generated $16.4 billion in operating income in the first quarter alone. The bigger penalty is the changes Google agreed to make with how it conducts its ads business, and Google may preemptively follow the same course in other markets.

Here's what investors need to know.

Too much control over data

The antitrust case brought forth by French authorities alleged Google privileged its own ad-buying tools -- Google AdX and DoubleClick for Publishers -- by allowing data to flow more freely between the two services.

Here's how that works in practical terms. When a publisher wants to fill excess ad inventory on its website, it uses a supply-side platform to put it up for auction across ad exchanges. Ad buyers are able to place bids on an exchange based on various criteria known about the website and the visitor.

The ad server will collect bids across multiple exchanges, and it fills inventory with the ads from the highest bidders across all the exchanges it works with. Google's server, formerly known as DoubleClick for Publishers, is one of the most popular among publishers.

But Google also operates an exchange, AdX. Google's ad server can collect data on what it saw on other exchanges, such as the price of winning bids, and it can (and currently does) share those data with AdX bidders. Additionally, AdX worked well with Google's own ad server, but it doesn't work so well with competing ad servers, reinforcing the use of DoubleClick for Publishers among website operators.

That free exchange of data among Google's products while limiting data and use for other ad tools is what upset publishers and convinced regulators to act.

What's changing?

Google plans to develop some solutions to address the issues brought forth in the case.

First, it intends to make it easier for bidders on other exchanges to access data from its ad server, including the minimum bid to win for auctions it previously privileged AdX with. The company mentioned it could face a technical challenge in some cases where bids take place outside of its ad platform, but it will work to offer as much data as it can.

Additionally, Google said it will be "implementing product changes that improve interoperability between Ad Manager and third-party ad servers." In other words, it won't force (for lack of a better word) publishers to use its own ad server in order to get access to bidders on its ad exchange.

On top of that, the company reaffirmed its commitment not to use data from other supply-side platforms on its own ad exchange in a way its competitors are incapable of reproducing.

Importantly, these changes may not be exclusive to France. In a blog post announcing the moves, the company wrote, "We will be testing and developing these changes over the coming months before rolling them out more broadly, including some globally." Google may make the changes preemptively as it faces the threat of antitrust accusations all over the world. It could help mitigate any regulatory fines the company attracts in the future.

What it means for investors

Google's Ad Manager -- which now encompasses both its exchange and server products -- is part of Alphabet's Google Network segment. In 2019 and 2020, Google Network ad revenue accounted for nearly 16% of Google's total ad revenue. That's not massive, but it's still significant nonetheless. The segment's growing roughly in line with ad revenue from Google's own properties outside of YouTube.

Implementing the changes above globally will likely have a negative impact on revenue growth from the segment going forward. So, it could fall to become a smaller piece of the business over time as YouTube and Google's own websites grow faster. 

Moreover, it's an admission that Google isn't completely immune to antitrust regulators making significant changes to its business practices, and that additional antitrust cases around the world could impact revenue further.

That said, the threat of increased regulation has been a major risk when investing in FAANG stocks for some time. Investors that are comfortable with the risk may still find Alphabet shares attractive, especially as the market digests the news about the settlement in France.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Adam Levy owns shares of Alphabet (C shares). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

A man looking at his laptop and thinking.
International Stock News

Why Alphabet stock was sliding today

Let's take a look.

Read more »

A man looking at his laptop and thinking.
International Stock News

Nvidia's stock was down despite its amazing earnings. Here's what history says is coming next

Although it might seem to defy logic, it's not an uncommon phenomenon.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Nvidia share price slips despite 94% revenue growth

Q3 earnings beat expectations, but what about guidance?

Read more »

high, climbing, record high
International Stock News

Could the S&P 500 Index hit 6,500 by the end of 2025?

Could the index climb higher?

Read more »

a small child holds his chin with his head on the side in a serious thinking pose against a background of graphic question marks and a yellow lightbulb.
International Stock News

Is it too late to buy Nvidia shares?

Is Nvidia stock a buy ahead of its third-quarter earnings report tomorrow?

Read more »

a group of people stand examining a large glowing cystral ball held in the hands of one of the group members while the others regard it with various expressions of wonder, curiousity and scepticism.
International Stock News

Here's what to expect from Nvidia on November 20

Can Nvidia score another win?

Read more »

Two people lazing in deck chairs on a beautiful sandy beach through their hands up in the air.
International Stock News

2 no-brainer Warren Buffett stocks to buy right now

While replicating Buffett's success isn't possible, there are a handful of his investments that are no-brainer buys.

Read more »

A man with a beard and wearing dark sunglasses and a beanie head covering raises a fist in happy celebration as he sits at is computer in a home environment.
International Stock News

3 reasons to buy Nvidia stock before November 20

This week marks a big moment for tech investors as perhaps the most anticipated earnings of the year will be…

Read more »