had the opportunity to discuss the Google AdMob acquisition with some members of the FTC staff last week by phone. Now, we read that the FTC staff is poised to recommend blocking the deal [http://www.businessweek.com/news/2010-05-01/google-s-admob-purchase-said-to-be-opposed-by-u-s-ftc-staff.html]. In light of this new news, which comes surprisingly soon after our conversation and is contrary to what we think should happen, we wanted to share our thoughts about the conversation and the FTC investigation. (The FTC made it clear we are free to discuss the conversation publicly.)
Why were we talking with the FTC? The FTC staff contacted us out of the blue through our web page, seeking app-developers’ perspectives on the deal. We assume they found us as part of an effort to canvass a range of app developers, maybe after coming across a mention of Wertago as one of the winners of Google’s Android Developer Challenge back in 2008.
Anyway, the take-away from our discussion is this:
We doubt the FTC understands this market well enough to justify a decision to block the deal. The staff members we spoke to were not particularly knowledgeable about the technology sector, or about mobile app development and monetization, or about the changes in the mobile advertising sector in the past year, or about the level of competition and pace of change and innovation in the market, however broadly or narrowly you define it. More generally, it seems obvious to us that the computer, web, and mobile technology sectors are so competitive and fast-moving that we don’t think ANYONE has the knowledge, expertise, economic insight, or clairvoyance to say with any confidence what effect the AdMob acquisition will have on competition in the market or on consumer welfare. We therefore think a recommendation to block the acquisition would be a huge mistake. In fact, we think the investigation itself shows how presumptuous and biased toward action (and hubris) regulators are, and how dangerous it is for the technology sector to embrace the idea that government should have the power to approve or disapprove mergers, acquisitions, and other private economic decisions.
To elaborate…
The first half of the call was simple information-gathering about our experiences trying to monetize Wertago via in-app advertising. Had we tried charging for the app, or were we monetizing entirely through ads? When did we start using mobile ads? What ad networks had we tried? What did we think of them? Did we use any ad “intermediaries”? Etc. Etc.
We answered as best we could from memory, offering to follow up with further details. E.g.,
We started using in-app advertising about a year ago, experimenting with several different ad networks, including AdMob, Quattro, and Mobclix. We found all of them to be pretty unsophisticated, lacking most of the value-adding customizations found in web-advertising portals; they often failed to fill ad requests, or filled ad requests with totally inapposite ads; and they provided very little monetary value at all. On the plus side, though, their SDKs were easy to install and use, so there is little cost in enabling (or disabling) them. Our app communicates with a central server, so we can easily change the source of ads and the frequency of displaying ads. In-app advertising is not the only monetization strategy we have considered or tried. Etc. Etc.
We asked them to email us with the specific questions that we said we could follow up on with further details, but we haven’t received the follow-up email yet, perhaps because they just haven’t gotten around to it yet, or perhaps, if the news reports are to be believed, because they’ve already made up their minds…)
This relatively straightforward portion of the conversation revealed a relative lack of fluency with things you’d want a powerful regulator to know comprehensively and understand deeply before making any sort of decision to interfere with a private economic transaction. For example, what determines an ad network’s value proposition, to both advertiser and developer or content-provider; what it’s like to choose among ad networks as an app developer, especially when the field is as inchoate as it was a year ago, and even today when it is still rapidly maturing; how Google’s entry into the mobile advertising market changes things for developers and advertisers; how the app developers’ experience compares among various ad networks’ SDKs, including start-ups and market dominant firms alike, and considering everything from ease of implementation to feature sets and customizability to advertising reach and monetization value; what it’s like to use AdWords and AdSense, whether for the web or mobile (the staff members we spoke with had never used AdWords); what other methods of monetization via advertising are realizable (e.g., partnering with, say, Citysearch); how difficult it is to create an ad network, whether for a dominant player in a mobile app category, or for an lesser-known but still excellent app developer like, say, the Wertago Team; what kind of advertising niches there are despite the existence of a market dominant player; etc.; etc.
The point is not that the FTC lawyers we spoke to were ignorant. The point is simply that we were surprised at how the fate of this transaction might hinge upon the views of people who know much less than they think they know, about an industry they think they can regulate surgically. The more competitive an industry is, the more perfect a regulator’s knowledge must be to justify preempting a deal as anti-competitive. Here, the regulator’s knowledge seems rather, to be blunt, shallow, while the industry as a whole and the market itself (at pretty much every level of granularity) is very competitive.
Indeed, the internet and mobile technology sectors right now are perhaps the most (or among the most) competitive and fast-moving industries EVER TO EXIST. The web and mobile spaces have remarkably low barriers to entry. That’s why there are so many people making a living, or supplementing their income, with small-business websites and now apps, and why a college student could create what has become in just five(?) years the most important social network in the world. And that’s why so many apps have been developed on the iPhone and Android platforms in just two to three years of their existence.
The advertising space is a part of that highly competitive, low-barriers-to-entry, fast-moving industry. Just because Google dominates does not mean the web and mobile ad space is not competitive. And just because Google buys up the competition doesn’t make the industry less competitive. Just imagine, as a thought experiment, what would happen if Google explicitly stated that it would buy up every start-up ad network that reached some minimum level of ad revenue. The FTC might think that’s presumptively anti-competitive, but we’re not sure that’s necessarily correct. The incentive might spur more entrants into the ad network business, just as the ADC prize money incentivized us to create Wertago. As we pointed out to the FTC staff members we spoke to, many ad networks likely start out tacitly HOPING to one day be bought out by Google, just as app developers tacitly hope to be bought out by this or that category-dominant player. Blocking the AdMob deal could actually remove one (very lucrative) exit possibility and thus effectively reduce the returns on the risky enterprise of starting a business. As a result, blocking the deal could actually REDUCE incentives to compete in the ad network space.
Without a crystal ball, the FTC is simply in no position to predict with any confidence what the acquisition will do to app developers, advertisers, and potential ad network market entrants. That last group (potential market participants) is important because you can’t simply judge the competitiveness of an industry by looking at the (visible) existing market participants; you also have to look at the (invisible) *potential* market participants, those who’re on the sidelines but could jump in at any time if the opportunity ripens. Especially in a low-barriers-to-entry market, every *potential* market participant is an important influence on existing market participants and the competitiveness of the market as a whole. Apple was not in the ad network business until recently, but it was a potential competitor for a long time coming, and not surprisingly, it is widely accepted that Google (over-)paid for AdMob to keep Apple from buying them, not to swallow up an upstart ad network. Who else is lurking in the shadows of the mobile ad business? We think there are plenty! And even more so because anyone can bankroll a serious competitor. A consortium of ad agencies for some of the biggest companies out there could easily create a mobile ad network that would instantly be worth looking at, and they could easily find funding; Facebook could easily use its social capital to create a mobile ad network in short order and easily find funding (if they don’t have it already); VCs could (and will) fund other new ad networks by unknown developers doing innovative, research-based value-added networking; the possibilities are endless. And these possibilities further explain why new entrants into the ad-network business will continue to crop up.
The only way to sustain profitability for Google is through increasing the value to advertisers and content-providers through innovation and reach. And indeed, Google dominates a still-competitive web market because AdWords and AdSense are vastly superior and because they keep making them better to attract the marginal advertiser and the marginal app developer, who are looking to advertise in nontraditional ways. Google’s many other innovations–Gmail, Google Maps, Google Docs, Google Translate, Android, etc.–have aimed to extend the reach of their advertisers’ ads, increasing the value of the Google ad network. Google, despite already being dominant for several years now, is still one of the most innovative companies precisely because the market is so competitive, even despite their dominance.
The crucial point here is 1) the marginal advertisers and developers, not the average or typical advertisers and developers, are who drive competition, and there will always be a fight for them, especially because the “tail is long” in web and mobile usage, and 2) the cost of switching ad networks in a mobile app is close to zero, and the cost of developing an ad network is not high and easily bankrolled. Those two things mean that Google’s dominance speaks more to its innovating to continue to provide greater value for its advertisers and content providers than it does to a lack of competition in the marketplace.
If the FTC is to believe otherwise, we believe it is attributable to a blend of ignorance, hubris, and possibly ideology. Ignorance of the highly competitive industry it is seeking to regulate, and of relatively basic economics. And hubris to believe it knows enough to predict what the effects of this acquisition, or blocking it, will be.
We found the FTC staff members to be relatively naive about the economic considerations that go into starting a business, choosing among ad networks, etc., etc., etc. We also sensed a predisposition toward regulation throughout the entire conversation, and a touch of defensiveness when we raised the foregoing points. Toward the end of the conversation, the main speaker from the FTC said, as if to dispell my concerns, “well, we haven’t made a decision yet whether to seek to block the deal.” It appears, however, that they were rather close to making such a decision, and the wrong decision at that.
We have no doubt the lawyers and economists at the FTC are intelligent and well-meaning people. But the FTC staff members, who are mostly generalist lawyers and economists (who probably have little experience starting businesses in the real world, let alone expertise in the rapidly evolving technology sector), simply cannot master the complicated, fast-moving, and ever-changing web and mobile economy, and internalize the incentives and competitive pressures faced by app developers, mobile advertisers, and other potential market participants, to calculate more effectively than the market as a whole what will ultimately provide the greatest value to consumers. And when they have the awesome power to nix acquisitions like this one, they’ll likely go around viewing everything as a nail to hit with their mighty hammer.
PS. In case there’s any question, we have no connection with Google. Yes, we won the Google Android Developer Challenge in 2008, but we got our prize money over a year ago and that was that; we’re totally independent, and our interaction with Google is simply via the use of Google services like Gmail, Docs, AdWords, AdSense, Maps, etc. Nor are we trying to curry favor with Google, or to get bought out by Google, as we don’t really see Wertago as something Google would really be interested in. We aren’t even Google partisans or evangelists. We all use gmail, and we think they’re an excellent company, but we have as many complaints as we do plaudits; we develop for both iPhone and Android and are split in our internal preferences for the iPhone v. Android phones. Our main interest here really is a practical and theoretical interest in the freedom of the technology sector from interference by regulators who think they know what’s best. We think the technology sector is competitive and robust, and government involvement and interference only serves to undermine that, by increasing rent-seeking and lobbying and hence the distribution of spoils not by competition and merit but by political connection and government fiat.
It appears the FTC staff is poised to recommend blocking the Google AdMob acquisition. We had the opportunity to discuss the deal with some members of the FTC staff last week by phone. We’re a bit surprised the staff is close to making a recommendation, given how unsophisticated their understanding of the mobile ad market seemed over the phone. Since we think it’s clearly the wrong recommendation, we wanted to share our thoughts about the conversation and the FTC investigation. (The FTC made it clear we are free to discuss the conversation publicly.) Read the rest of this entry »