How Does Google Affect Digital Advertising In The Post Cookies Era?

Google has been pushing chrome to abandon the use of third-party cookies (data stored on users' local terminals) and adopt other alternatives to support online advertising business in the face of stricter privacy protection. According to the latest news, Google has started testing floc (Federated learning of cohorts) new advertising technology for developers on March 30, and the replaced third-party cookies will stop using in the first quarter of next year.

"ID based on the user's personal level does not meet consumers' growing expectations for privacy protection, nor does it meet the regulatory constraints of rapid development, so it is not a sustainable long-term investment," David Temkin, Google's director of advertising privacy, said in a blog post on March 3

The news of abandoning third-party cookies sparked panic in the digital advertising industry, with investors worried that the controversial decision would have a huge impact on the large-scale digital advertising industry. On March 3, the trade desk, liveramp and criteo fell 12.78%, 8.43% and 1.6% respectively.

However, Google believes that abandoning third-party cookies does not mean cracking down on the digital advertising industry, but rather promoting the industry in a way that is more conducive to privacy and security. The Internet advertising giant claims that an effectiveness test of floc's new technology shows that advertisers can see at least 95% of the conversion rate for every dollar they spend, compared with the advertising effect of third-party cookies.

Twenty years ago, with the rise of the Internet, Google changed the pattern of advertising with its dominant position in online search. So, in the post cookie era of abandoning third-party personal data, how will Google influence the trend of digital advertising industry?

Privacy protection

Floc proposed by Google is a new way for digital advertising. As an alternative to third-party cookies, floc does not track the traces of individual users' online activities, but achieves the purpose of pushing related advertisements by gathering user groups with similar interests.

As a string of small code of Internet users' browsing traces, cookies are an important tool to help application developers and advertisers restore the user image and push customized advertisements. However, with the strengthening of global privacy awareness, it is controversial how to balance the promotion of digital advertising services and the risk of privacy security caused by third-party cookies. According to a Pew Research Center study, 72% of people think that almost everything they do online is tracked by advertisers, technology companies or other companies, and 81% believe that the potential risks they face from data collection outweigh the benefits.

"Cookies can not only identify clients and users when they log in, but also naturally have the technical advantages of tracking users, which may track users' browsing and clicking behaviors, and then the technology is used to form user portraits, predict behaviors, push marketing advertisements, and so on." Zhang renzhuo, chief executive officer of Beijing Shangyin technology and an expert on personal information protection, told the 21st century economic report that "as a result, third-party statistical companies and third-party marketing companies have emerged, using the mechanism of third-party cookies to read and integrate the behavior of the same user on different websites, causing a lot of risks and damages to users' personal data."

As Google has repeatedly stressed, abandoning the use of third-party cookies is subject to increasingly stringent privacy regulations. In recent years, the technology giant with massive user data has been fined heavily for improper privacy measures. In December 2020, in accordance with the French data protection law, the French state and freedom of Information Commission imposed a fine of 100 million euro on Google's illegal collection of user's privacy push advertisements. After investigation, the agency found that Google used cookies for advertising purposes without the user's consent, and did not provide users with any details about the use of cookies.

In order to better deal with privacy regulation, Google put forward the "privacy sandbox" initiative in 2019, aiming to create a tool that can not only protect users' privacy, but also provide enterprises and developers with tools to develop digital business. Privacy sandbox claims to have three purposes: first, to prevent users from being tracked while browsing the web; second, to enable developers and publishers who respect privacy to still be able to make profits; third, to keep the Internet open.

As one of the many initiatives of the privacy sandbox initiative, chrome's decision to abandon the use of third-party cookies was proposed in 2020 and replaced by a new scheme called floc, which allows advertising agencies to place ads based on users' interests without infringing on privacy.

Analysts at Needham, an investment bank, believe that Google will not have a chance to track user information on its website after 2022 under strict regulatory scrutiny, and their announced floc is the best privacy choice. "While at worst it could reduce Google's net revenue by $5 billion, it also saves Google 25 times its revenue in privacy regulation fees."

However, floc has also been denounced by privacy figures. Pieter artnz, a security expert at Malwarebytes, a U.S. cyber security company, questioned: "is floc a milestone in privacy protection, or is it just a better tracking technology?" Benett Cyphers, a technologist at EFF, a digital privacy organization, called floc a "terrible idea." he said Google eliminated one way of tracking users, but introduced a more aggressive way. "Floc should replace cookies, but in testing, it added cookies."

Advertising influence

According to a report released by the advertising agency GroupM, in 2020, under the influence of the epidemic, the advertising revenue of Google, Facebook and Amazon, the three online advertising giants, will account for more than half of the total advertising revenue in the United States for the first time, and its share in the digital advertising market will rise from 80% in 2019 to 90%. The report points out that the growth of digital advertising business triggered by the epidemic continues to lean towards these Internet technology giants, and has not flowed to other digital advertising companies.

The digital advertising marketing industry has always relied on third-party cookies for business, and Google's decision to give up using cookies has exacerbated concerns about the tilt of advertising giants. The trade desk, liveramp and criteo fell 12.78%, 8.43% and 1.6% respectively on the same day of Google's statement on March 3.

"This statement seems to make it difficult for the trade desk to purchase ads using the ID on Google's advertising platform or provider's platform." Macquarie, an investment bank, points out that Google's decision clearly defines the role Google will play in Internet advertising, rather than the trade Open Internet advertising technology companies like desk, liveramp and criteo play a role, but it still raises the garden wall further, as any advertiser using Google's ad service technology will have to adopt Google's new agreement.

Keybanc, another analyst, downgraded criteo from "overweight" to "flat" and said the inherent problem with current efforts to regulate Internet companies is that efforts to provide more privacy will only make the biggest companies stronger.

In fact, Google abandoned the use of third-party cookies, but also created a new advertising push tool floc. The biggest difference between the two is that cookies make customized advertising push targeted at individuals, while floc will make advertising push targeted at user groups based on similar interests, rather than personal level.

Needham analysts said they were more optimistic about personal ad push: "we believe that personal ID will outperform group based push, because over time, ad buyers demand better return on advertising investment, and Google's privacy sandbox and floc will make this goal more difficult."

Needham estimates that floc is worth less than a single ID, and Google's $17 billion in online advertising revenue will be transferred to advertising technology companies such as the trade desk over the next five years.

Zhang renzhuo told reporters: "despite the controversy of monopoly and re identification of consumers, Google's privacy sandbox uses technologies such as locally learned group tags to reduce the risk of excessive collection of cookies, especially abuse, and achieve the business purpose of advertising recommendation relatively well. It can be seen that actively exploring and constructing the privacy enhancement technology system and gaining the trust of consumers can realize the collection of more data, the expansion of the scope of data use, and even the sharing and exchange of data under the premise of protecting consumers' privacy, so as to achieve the business objectives of enterprises. "

Suspicion of monopoly

Google abandoned the use of third-party cookies in order to comply with privacy regulations, but it has brought antitrust concerns of privacy regulators.

On January 8, the UK competition and Market Authority announced that it was conducting an antitrust investigation into Google's "privacy sandbox" proposal to remove third-party cookies from Chrome browser. The agency said it had received complaints from marketing staff of a group of newspaper publishers and technology companies called open web, claiming that Google was abusing its market dominance through the proposal.

The UK competition and market authority said the survey would assess whether the proposals would lead to a greater concentration of advertising spending on Google's ecosystem at the expense of its competitors. In a recent market study of digital advertising on online platforms, the agency highlighted some concerns about its potential impact, including the potential for them to consolidate Google's market power by weakening publishers' revenue capabilities and competition for digital advertising.

On March 12, Margrethe vestager, the EU's antitrust Commissioner, revealed that Google's advertising business was facing a "massive investigation.". "We will make full use of every tool we have and take the necessary antitrust actions to ensure market fairness," vestag told the survey at an online event organized by Eurocommerce, the European retailer Association

Earlier this year, the European Commission sent a questionnaire to publishers and advertising companies to collect information about Google's advertising ecosystem. This questionnaire will be used as part of a survey of Google data usage to see if Google's plan to phase out third-party cookies from chrome will have any immediate impact.

In addition, the United States also has a formal lawsuit against Google's digital advertising business. In October 2020, the U.S. Department of Justice jointly filed an antitrust lawsuit against Google, claiming that Google constituted an illegal monopoly in the field of search engine and digital advertising. According to the latest report of foreign media on March 18, Google's upcoming cookie privacy policy has attracted the attention of the U.S. Department of justice. It is investigating whether Google uses Chrome browser to prevent competitive advertising companies from tracking users through cookies. However, it can also collect data through cookies, analysis tools and other sources to reduce competition.

On December 16, 2020, Texas attorney general Ken Paxton led 10 state attorneys general, accusing Google of illegally manipulating the system while operating its digital advertising sales auction. A day later, 38 state attorneys general also filed antitrust lawsuits against Google's search engine, saying that Google's search results were biased toward its own services rather than those of more professional competitors, a strategy that harmed competitors.

It is worth noting that Google is also an Internet company that relies on online advertising for huge revenue. According to the fourth quarter financial report of Google's parent company alphabet, advertising revenue was $46.199 billion, accounting for 81.2% of the total revenue of $56.898 billion. From this perspective, Google and many digital advertising marketing companies are both upstream and downstream relationship, but also competitive relationship.