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17 June 2010
On May 21 2010 the five commissioners of the Federal Trade Commission (FTC) voted unanimously to approve Google Inc's proposed acquisition of AdMob Inc following a six-month second request investigation. This high-profile transaction received significant press coverage and attention from various members of Congress. In addition to a press release announcing the decision, the commissioners took the fairly unusual step of issuing a closing statement to explain the decision. According to the statement, the commissioners' primary rationale for clearing the deal was the entry of Apple Inc into the relevant market via its acquisition of Quattro Wireless, a direct competitor of Google and AdMob.
Google announced its acquisition of AdMob on November 9 2009 in a transaction valued at $750 million. AdMob is a mobile advertising network that facilitates transactions between advertisers and mobile 'publishers' (ie, developers of software applications - known as 'apps' - or websites that are designed exclusively to be used on mobile phones or other mobile devices). AdMob was one of the first mobile advertising networks to focus on the iPhone when the Apple App Store opened in June 2008, and the FTC's closing statement noted that "AdMob's revenue and market share are derived largely from the iPhone platform". Google has a beta advertising network for mobile applications called AdSense for Mobile Applications, which also operates on numerous iPhone apps.
In January 2010 Apple announced its acquisition of Quattro, another significant mobile advertising network. In April 2010 Apple Chief Executive Officer Steve Jobs announced that Apple had transformed Quattro into a new mobile advertising platform called 'iAd' that would be built into the new version of the iPhone operating system planned for release in June 2010. This meant that iAd would automatically be available to every iPhone app developer. Jobs touted iAd's unique ability to take advantage of functionality in the iPhone ecosystem, which he indicated that no other advertising network could match. Further, Apple released new terms of service for app developers that prohibited developers from sending any device data or user data to third-party advertising networks, thereby minimizing other networks' ability to provide targeted advertising on Apple devices.
The FTC's closing statement indicated that the decision not to challenge the transaction:
"was a difficult one because the parties currently are the two leading mobile advertising networks, and the [FTC] was concerned about the loss of head-to-head competition between them."
According to the FTC, Google and AdMob "generate the most revenue among mobile advertising networks". The closing statement also pointed to:
"evidence that each of the merging parties viewed the other as its primary competitor, and that each firm made business decisions in direct response to this perceived competitive threat."
Despite the referenced evidence, the FTC decided not to challenge the transaction because the commissioners recognized that Apple had both the ability and the incentive to ensure that other advertising networks would not raise prices or reduce the percentage of advertising revenue that they share with app developers. The FTC stated that it had "reason to believe that Apple quickly will become a strong mobile advertising network competitor". In particular, Apple "has extensive relationships with application developers and users", and it "is able to offer targeted ads (heretofore a strength of AdMob) by leveraging proprietary user data gleaned from users of Apple mobile devices". The FTC also noted that:
"Apple's ownership of the iPhone software development tools, and its control over the developers' license agreement, give Apple the unique ability to define how competition among ad networks on the iPhone will occur and evolve."
Therefore, the FTC concluded that:
"[a]s a result of Apple's entry, AdMob's success to date on the iPhone platform is unlikely to be an accurate predictor of AdMob's competitive significance going forward, whether AdMob is owned by Google or not."
The FTC also examined competition on non-Apple devices, where Apple presumably will not have the unilateral ability to discipline other advertising networks. The closing statement noted that Google and Apple compete more broadly in the mobile device space, with each company offering mobile device hardware and operating systems. Google developed the open source Android mobile operating system, which runs on a variety of devices, and also sells its own Android mobile device called the Nexus One. The success of a mobile device platform depends in part on the number and quality of apps available on the platform, which in turn depends on app developers' ability to monetize their content effectively on the platform. As a result, the FTC concluded that "Google has a strong incentive to encourage the development of applications on Android to maintain the competitiveness of Android against the iPhone", and would not have an incentive to exercise market power over advertising on the Android platform.
There are at least two primary conclusions to be drawn from the FTC's closing statement. First, the ability of a horizontal competitor to curtail or eliminate competition through its ownership of the platform on which the merging parties compete can be dispositive. Second, events that occur during the second request process can have a dramatic impact on the antitrust review, and the parties must be prepared to bring new developments to the agency's attention quickly and effectively.
The closing statement also provides some subtle insights into the FTC's current approach to merger review. First, the closing statement is silent on the topic of entry. This is significant because entry could have been dispositive to the FTC's analysis – after all, this is an industry that did not even exist a few years ago and does not have significant upfront investment requirements or IP barriers. Second, the closing statement completely omits any discussion of other mobile advertising networks. There are a number of other current competitors in the mobile advertising network business (eg, Millennial Media, Jumptap, Greystripe, Mobclix and InMobi), and the closing statement does not explain why those networks would not have the ability to expand their output if Google/AdMob were to raise prices and restrict output. Third, and perhaps most importantly, the FTC expressly dismissed the argument that it should tread more carefully when analyzing new markets in which every current competitor is a recent entrant, entry barriers are unclear and there is little reliable historical data. To the contrary, the FTC stated that it:
"must subject mergers in nascent markets to the same level of antitrust scrutiny as mergers in other markets, taking into account all relevant information that becomes available during the course of an investigation."
This is a broad statement that could reflect more stringent review of acquisitions in nascent, rapidly evolving technology industries.
For further information on this topic please contact Michele S Harrington at Hogan Lovells US LLP's McLean office by telephone (+1 703 610 6100), fax (+1 703 610 6200) or email (firstname.lastname@example.org). Alternatively, contact Logan M Breed, Michaelynn R Ware or Corey W Roush at Hogan Lovell US LLP's Washington DC office by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email (email@example.com, firstname.lastname@example.org or email@example.com).
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