So you want to launch an online retail business. Cool! Let's get started. First you'll need a website and inventory to make an online store. Now you need customers. They're out there, surely, somewhere on the internet.
To find them, chances are you're going to have to go through at least one of three giant tech companies: Google, Facebook or Amazon. Together those companies are valued at nearly $4 trillion. All three dominate key features of online commerce and the internet's current infrastructure.
EMarketer has called Google and Facebook a "duopoly" in online advertising, together accounting for more than 52% of the market. Amazon, with an expanding advertising arm, has a growing but still much smaller share. For many traditional and online retailers, advertising on Amazon may be a nonstarter, given that they see the e-commerce giant as a competitor. That leaves, to a large degree, Google and Facebook.
"The main theme that ties them all together is the emergence of data as key to unlocking success in marketing," said Andrew Frank, vice president and "distinguished analyst" with Gartner. "It's all about the data, and the fact that the data is concentrated in these particular companies gives them tremendous power. Collectively they account for the strong majority of resources that retailers are putting into digital marketing."
Retailers rely heavily both on Google and Facebook's platforms as well as their advertising services to acquire, interact with and convert customers. Ads and organic content on both platforms are akin to storefronts on a street in their ability to draw in potential customers.
Both Google and Facebook have been recently sued by federal antitrust enforcers as well as by groups of state attorneys general for allegedly abusing their market positions and violating antitrust laws meant to curtail and potentially break up destructive monopolies. The outcomes of the suits, as well as growing bi-partisan interest in Congress in reining in big tech companies, could have a major impact on retail given the industry's deep dependence on the tech platforms when doing just about anything online.
Search: Online 'oxygen'
Since its founding, Google has acted as a kind of tour guide to the internet. The company says that its mission is to "organize the world's information and make it universally accessible and useful."
The "world's information" includes a lot of data points. Among them are retail companies, their products, and those products' prices and competitors, all of which are findable on (and indeed, most often found on) Google.
"You could make an analogy that search is the oxygen of customer acquisition," Frank said. "You can survive for periods of oxygen deprivation, but it's pretty limited. And it's definitely not something that you could survive for very long."
Google has a commanding lead over all other search engines, accounting for 90% of all general search engine queries in the U.S. and 95% of queries on mobile devices, the Department of Justice noted in its complaint against the company, which focuses largely around the company's agreements with device makers to install its apps and exclude others. Google has called the DOJ's lawsuit "deeply flawed" and said it "relies on dubious antitrust arguments to criticize our efforts to make Google Search easily available to people."
"This lawsuit would do nothing to help consumers," Google Senior Vice President of Global Affairs Kent Walker said in a company blog post. "To the contrary, it would artificially prop up lower-quality search alternatives, raise phone prices, and make it harder for people to get the search services they want to use."
In product search — key to retailing online — Google and Amazon have long dominated as the starting point for discovery. (Amazon, too, has been the subject of antitrust scrutiny, including by the House of Representatives. The company is also reportedly under investigation by multiple states and the FTC for some of its business practices.)
Paid listings at the top of Google's search results is one way brands and retailers make their products found. In 2019, Google brought in $98.1 billion in search advertising revenue. Just how expensive it is for advertisers like online retailers and brands depends on how exactly they are using it.
"Compared to other forms of advertising, they have the veneer of being pretty cost effective," Sucharita Kodali, vice president and principal analyst with Forrester, said of digital advertising through Google and Facebook's respective platforms. Few firms, she argues, parse out whether sales would have happened anyway. And the costs also depend on the campaign.
With Google, paying for search ads tied to your brand name may be relatively cheap. On the other hand, buying search ads tied to other keywords, to a product you're selling for instance, gets much more expensive. "When companies do break out the brand versus non-brand, the non-brand terms end up being like an $80 cost per order, or some crazy cost per order that is just not sustainable," Kodali said.
"Search is such a critical way that companies market themselves because … it is the only channel where the customer raises their hand and says, 'I am in the market for this product.'"
Senior Analyst, Forrester
As easy as it sounds to launch an online venture, the costs of doing business can add up quickly for new e-commerce players and direct-to-consumer brands. "It's one thing if you're Saks or you're Ulta, where everybody knows who you are," Kodali said. "If you take a new startup, how is anybody supposed to find out who you are? So you have to buy the generic terms."
Collin Colburn, senior analyst with Forrester, said that clients frequently ask how they can "wean" themselves off paid search advertisements with Google. "They say they're over-indexing and spending too much on Google," he said, with some companies spending more than 50% of their digital ad budget on paid search, including to "defend" their own brand terms. And there's a reason for that. "Search is such a critical way that companies market themselves because … it is the only channel where the customer raises their hand and says, 'I am in the market for this product,'" Colburn said.
How Google lays out its search pages has also had an impact on companies that rely on it. In a massive report on dominant tech platforms, the Democrat-led U.S. House of Representatives' subcommittee on antitrust noted that Google, in the years after 2000, changed the display of ads on its search pages, which had the effect of "(1) increasing the number of ads placed above organic search results, and (2) blurring the distinction between how ads and organic listings are presented on Google's search results page."
According to the House report, "These changes have effectively raised the price that businesses must pay to access users through Google." Citing the United Kingdom's competition regulator, the report noted that Google's market power allows it to charge 30% to 40% more than Microsoft's Bing for search advertising.
"It's a toll. It's not that much different from extortion," said Sally Hubbard, director of enforcement strategy at the Open Markets Institute, a nonpartisan organization that advocates for more aggressive enforcement of antitrust laws. With a small retailer like a local sports store, "you're not going to find it unless they're paying for a search ad," Hubbard added.
"There's no competition for search ads because Google has a monopoly on search. What does that lead to? Higher prices for consumers, less money available for [advertisers'] employees, less money for innovation," Hubbard said.
It's not just paid search that consumes retail marketer's budgets and resources. Digital retailers may also have staff dedicated to pushing their brand higher in natural, or organic, search results, a practice known as search engine optimization. And because so many searches take place in Google, SEO mostly means optimizing for Google.
"SEO has hugely untapped potential for many companies," Colburn said, but added that it's a challenging skill to learn. "It's a hell of a lot harder" than paid search, he said.
The difficulty for many who are trying to navigate their placement in Google's search results is that its algorithms for ordering pages are largely a black box to outsiders. Asked if online retailers would benefit from more competition in search, Gartner's Frank said, "It's more a matter of transparency than diversity."
"Google would not be as much of a problem for retailers if the rules for organic search were clear," he added.
Yet Google is in a bind there in some respects. Colburn said Google does not consult on SEO and doesn't reveal its ranking factors. "I don't fault them for that," he added. "People would be gaming the system left and right. But it also doesn't help marketers."
Retail as an industry has a lot at stake and is watching the cases against Google very closely. "If you're looking at product search, the two places people start most is Google or Amazon," said Nicholas Ahrens, vice president of innovation and lead tech policy advocate at the Retail Industry Leaders Association, whose members include some of the country's largest chains, including Walmart and Target. "And so that's why we care so much about product search — as a vehicle, as a path to purchase, and why we care about it on behalf of the industry."
Search engines, Ahrens added, "are a consolidated group, they have significant market share, and they just haven't faced a lot of scrutiny."
A 'monopoly tax' for retailers online?
Search isn't the only way retailers depend on Google in their online marketing. The company also runs a $21.5 billion a year third-party advertising business through its AdMob, AdSense and Google Ad Manager services.
With its wealth of user data, Google can serve up ads tailored to individual consumers that they view on websites around the internet, including major media properties like The New York Times and USA Today's websites.
Online display ads make up a complex market, with several layers of intermediaries between web publishers and marketers like retailers. It includes ad servers that manage publishers' ad inventory as well as marketplaces that match buyers and sellers of display ads, and ad buying tools that advertisers use to buy display ads from exchanges.
An antitrust lawsuit filed by 10 states, led by Texas, alleges that "Google possesses monopoly power in each of these distinct markets" in digital advertising. The company sits on multiple sides of transactions while keeping much about these purchases, including Google's cut of the profits, a secret from buyers and sellers of ad space. According to the attorneys general, evidence suggests that publishers selling ad space through Google typically keep around 70% of the revenue, and sometimes as little as 58%.
"Imagine if the financial markets are controlled by one monopoly company, say Goldman Sachs, and that company then owns the NYSE, which is the largest financial exchange, that then trades on that exchange to advantage itself, eliminate competition, and charge a monopoly tax on billions of daily transactions," the attorneys general wrote in their complaint. "That is the world of online display advertising today."
According to the House report, Google "captures over 50% of the market across the ad tech stack," meaning the intermediaries that allow publishers and advertisers to buy, sell and place ads. That includes the leading ad exchange as well as both buy-side and sell-side platforms that trade on its own exchange.
In the state complaint against Google, the attorneys general alleged that "[t]he monopoly tax Google imposes on American businesses — advertisers like clothing brands, restaurants, and realtors — is a tax that is ultimately borne by American consumers through higher prices and lower quality on the goods, services, and information those businesses provide."
In 2017, fellow tech giant Facebook entered the market for header bidding, a kind of display ad that publishers originally pioneered as a way to free themselves from Google's grip, according to the states' lawsuit. "Like Google, Facebook brought millions of advertisers on board to reach the users on its social network," the attorneys general said in their suit. That made Facebook a potential competitor in that market. Soon after, Google made overtures to Facebook.
"In the end, Facebook curtailed its involvement with header bidding in return for Google giving Facebook information, speed, and other advantages in the [redacted] auctions that Google runs for publishers' mobile app advertising inventory each month in the United States," the lawsuit alleges.
Facebook's 5.6 billion eyeballs
Facebook's own digital advertising is smaller than Google's — but still massive and hugely profitable. In 2019, the social media giant made just shy of $70 billion from advertising revenue. In its most recent quarterly report, it boasted nearly 2.8 billion monthly active users, more than a third of the world's population.
That is a whole lot of eyeballs on the screen. And like Google, Facebook has reams of data on its users to serve up targeted advertising. Facebook's 2012 acquisition of the upstart Instagram widened its breadth and offering, and added a new advertising medium as well.
The combination of scale and targeting makes Facebook a top outlet for marketers, including in retail. The tech company has a webpage dedicated to retailers with tips for helping them drive omnichannel sales, acquire customers and promote their brands through its social media platforms and advertising services. Last year, Instagram launched an e-commerce hub that allows online retailers to sell to the platform's users.
Forrester's Colburn said Facebook is most useful for online retailers in post-purchase and early customer acquisition marketing. "Facebook is great in engaging existing customers who know your brand, use your product, love your product, or in getting new customers," he added.
Its value to marketers has made the platform wildly rich, while its value to users has made it wildly powerful in the digital world. After years of growing calls for scrutiny, federal antitrust enforcers have taken action against Facebook, filing a lawsuit against it that aims to block what the Federal Trade Commission alleges is anticompetitive conduct, and potentially forcing the company to divest assets or restructure.
Specifically, the agency accused Facebook of buying WhatsApp and Instagram to "squelch those threats" against its namesake social network.
By now, Facebook's dominance over social media is deep and enduring, thanks largely to its existing scale and the convenience of everybody already being on Facebook. "Even an entrant with a 'better' product often cannot succeed against the overwhelming network effects enjoyed by a dominant personal social network," the FTC said. And while other social networks exist — Twitter, Snapchat and Tiktok among them — they are essentially bit players in the digital advertising market compared to Facebook.
For retailers and other marketers, that dominance means that Facebook "deprives advertisers of the benefits of competition, such as lower advertising prices and increased choice, quality, and innovation related to advertising," the FTC alleges.
Facebook, in its response to the FTC, noted that its acquisitions of Instagram and Whatsapp have already been reviewed and cleared by antitrust officials. "In addition to being revisionist history, this is simply not how the antitrust laws are supposed to work," Facebook General Counsel Jennifer Newstead said in a company post. "No American antitrust enforcer has ever brought a case like this before, and for good reason."
Can retailers and brands quit Google and Facebook?
However they play out, the various antitrust suits against Facebook and Google matter for retailers because of just how much the industry interacts with those two companies online. For e-commerce specialists, their businesses are dependent on Google and Facebook, and their platforms. And those platforms can consume a good chunk of an entire venture.
"For an e-commerce company, 10% of its spending is on marketing, and of that the vast majority is going to be Google, Facebook and sometimes Amazon if it's a brand," Forrester's Kodali said. "You're talking, straight off if you're a $100 million business, millions are spent on just the media for Google and Facebook, and then the people to support that, whether it is who's managing search and managing the keyword list, and maybe an agency that you're hiring."
Companies of that size can have a dozen or more people dedicated to marketing, most of them devoted to customer acquisition. "And all of your customer acquisition is Google and Facebook," Kodali said. And that doesn't include the IT staff, programmers, graphic designers, social media specialists, and ad developers who are building campaigns and tech around Google and Facebook's platforms.
Laura Russell, senior director of marketing with digital-focused agency Adlucent, said by email that up to 90% of retail clients' digital marketing budgets are comprised of spending with Google and Facebook, including Google's Youtube, Facebook's Instagram and Google's display ad service.
"Most retailers and online brands would face serious performance challenges if advertising on these platforms were suddenly not possible for some reason," Russell said, describing Google and Facebook's importance to retail clients. "If more alternatives with scale were available they would be worth testing, but from an e-tailer's perspective, there are other important factors to consider, including functionality, reliability, integration with other platforms, and attribution."
Russell also noted that retail firms "can certainly acquire customers without Google or Facebook" with the right strategy.
"For example, a strong PR strategy with ample media coverage, influencers across emerging social platforms like Tiktok, direct mail, email, and grassroots marketing are all still highly effective," Russell added. "That being said, Google and Facebook offer tremendous scale as well as clear audience & keyword targeting that can provide a more efficient ROI in many cases, as well as a reach typically stronger than other earned and paid channels."
Last summer, a host of companies, including major retail names, boycotted Facebook and pulled their advertising over concerns that the social media giant was helping the spread of misinformation and hate speech. Kodali studied the effect that pulling ads had on publicly traded companies that participated in the boycott. Of the 43 publicly traded companies examined by Forrester, only seven saw their revenue decrease in the third quarter of 2020 versus Q2. Revenue at the other 36 companies increased quarter to quarter.
"Very, very few companies have been bold enough to just completely shut off Google or Facebook to see the impact on their businesses," Kodali said. "And that was one time that they did all collectively do so. … The fact that they did okay, and there was literally no negative impact, they did no worse than their worst timeframes, to me suggests that the incremental lift [i.e., from Facebook ads] is very, very limited."
In other words, pulling ads from Facebook (which for many of the boycotters in general was a temporary move) caused little if any pain for those companies. Meaning that while the social network vacuums up a tremendous amount of money from retail companies and others, it's still an open question whether that spending is a truly unavoidable cost of doing business imposed by Facebook.
It's perhaps also worth noting that Facebook itself appeared relatively unscathed by the boycott. Facebook's CFO said in July, when much of the boycott took place, that the tech giant's ad revenue grew 10%. While some boycotted, Facebook's fortune kept getting bigger.
Bipartisan scrutiny on big tech
The state and federal suits could take years to play out. And while they bring with them the potential for dramatic action against the tech giants, the government hasn't actually broken up a company for decades.
Federal enforcers since then have reached settlements and imposed behavioral restrictions on companies. But to many critics of status quo enforcement practices, those have been a disappointment. "If we see a settlement, then we know it's a failure," Hubbard said of the current lawsuits. "They should be litigated to the end."
The cases are all in the early stages, and it's not yet clear how the Biden Administration's DOJ and FTC will approach them.
Moreover, the DOJ and states' suit against Google center on different claims. The DOJ suit is focused on a relatively narrow set of issues around Google's exclusive contracts to install its search and other apps on mobile devices, among other issues, while the Texas-led suit focuses on Google's ad business. Hubbard suggested the DOJ could join the state suit as well, expanding the antitrust lense on Google from the federal level.
Even if the government and states press their cases against Facebook and Google all the way through a trial, it's still up in the air how judges will rule after decades of a relatively laissez-faire approach to enforcing antitrust laws that goes back to the Reagan administration.
But judges won't necessarily be the last word on big tech. Both Democratic and Republican lawmakers have floated various proposals for reining in platforms, such as laws that would split platforms from commercial and online retail operations, impose neutrality and nondiscrimination principles to platforms, or create interoperability rules that could increase competition.
"These antitrust cases take a long time and we have imminent problems, whether it be speech or supporting small businesses," Hubbard said. "The biggest monopolies have been getting richer during the pandemic."
Ahrens said that RILA has not thrown its weight behind any potential legislative idea yet but is watching what's happening on the Hill as well as in the federal cases. For the trade group, the specific content of legislative proposals matters a lot and could affect its members in different ways. "The devil is in the details," Ahrens said.
"There is bipartisan agreement that something needs to be done," he added. "If this isn't the moment, then I don't know what is."