“Lemons” and Antitrust: Why Facebook and MZ Are AdTech Frenemies — DSP Cognant

(Postscript: July 11, 2018)

Adexchanger reported that MZ has shut down its independent DSP business Cognant and laid off all 125 employees as well as half of its in-house media buyers.

(Published: March 1, 2018)


Facebook has deflected the antitrust case against it by assisting independent demand side platforms (DSPs) like MZ’s (Machine Zone’s) Cognant ® to build strong countervailing platforms.

Facebook is signaling that it does not intend on being “the Microsoft of the 1990s” by throttling competition on the demand side of the ad impression market.

Furthermore,  this cooperation makes sense from a pure business perspective as Facebook is “shifting up the demand curve” of advertisers by working with independent DSPs to improve ROI on ad buys resulting in a willingness to pay higher prices.

Facebook wants to reduce information asymmetry in the ad impression market. It is in its own interest to help make it a market of “peaches” not “lemons” ala George Akerlof’s iconic economics paper “A Market for Lemons”

Indeed, we see the current digital ad impression market as the “mother of all markets for lemons”  accompanied by  a whole new lexicon — clickbait, click farms, fake news,  brand safety, and walled gardens.


The Intermediate Market for Digital Ad Impressions

The intermediate market for digital ad impressions is now dominated by the Google – Facebook duopoly.  In 2017, the duopoly’s total share of ad impression sales was estimated at 60.4% (see below) .

In the fast growing digital native ad subset market, the duopoly’s share rose to 91.9%.



On the extreme demand-side of the digital ad impression market are advertisers wishing to buy ad impressions and on the extreme sell-side are content publishers selling ad impressions.  In between  is a complex web of software intermediaries that would dumbfound (and still does) Madison Avenue.

The data above largely reflects ads embedded in mobile and PC content.  The market for real time ad impressions embedded in ad-supported streaming TV — as opposed to subscription-supported Netflix and Amazon Prime — is just beginning.

The value of the impressions to advertisers is a function of viewer eyeballs, associated data, and engagement as measured by time spent on the site.  Sheer eyeballs without data is of little value to advertisers as exemplified by Twitter.  Facebook and Google Search/YouTube dominate because of all three — eyeballs, data, and engagement.

If you ask people in the tech world what is the business of Facebook and Google, they would not say social networking or internet search or video delivery.  They would say the two dominate the performance marketing business — selling ads with quantifiable (as opposed to estimable ala Nielsen) results as in costs per click or impression.

Between advertisers and publishers is an adtech intermediate market. It consists of supply-side platforms (SSPs) also dominated by Google and Facebook with Amazon being a fast riser in the SSP space.

Next comes ad exchanges where transactions and pricing takes place increasingly via real-time auctions.  Google dominates with DoubleClick AdExchange.  Facebook launched its own FBX in 2011 but let it slowly die over the next three years.

Next comes demand side platforms (DSPs), which is the most competitive segment.  Google has its own internal DSP called DoubleClick Bid Manager which dominates ad buying both on Google’s “walled garden” of search and on its own subsidiary YouTube.

Facebook has an internal DSP called Facebook Ad Manager useful to small and medium business wishing to buy ads within its eponymous “walled garden.” But, Facebook seems to be holding back from customizing its internal DSP to cater to large advertisers with unique needs.

Because of the publicity surrounding Cambridge Analytica, Facebook is under enormous pressure to pull back all the ways its allows third parties to access its user data.  We think it would be “throwing out the baby with the bathwater” if Facebook were to  pullback of all adtech — SSP, AdEx, and DSP — within its “walled garden”.

Rather, it needs all the help it can in filtering out “lemons”.  It is in Facebook’s own interest to foster independent DSP’s with “clean room” access (see below) to data.

The Focus of Antitrust Concerns

The sheer scale of the Google – Facebook duopoly is the current focus of antitrust concerns. But, the extent of the duopoly’s vertical integration —  owning the full vertical stack of businesses from content publishing to a SSP to an ad exchange to a DSP — needs to be analyzed in much greater detail by adtech experts for potential antitrust violations.

Antitrust concerns so far has focused on the supply side with the most recent flare-up being Facebook’s decision to limit third-party news feeds inserted into the social graphs of Facebook users.

This supply-side focus on content is understandable as such developments hurt the job prospects of the very paid  tech and business writers [ not us 😉 ] who write about Google and Facebook.

In contrast, this paper focuses on the demand-side and DSPs.  We think a recent development on the demand-side  deserves more attention. This is because it signals that Facebook is seeking to deflect antitrust concerns by actively assisting in the development of strong, independent DSPs.

Facebook’s Effort to Foster Strong Independent DSPs

In December 2017, Tech Crunch published an article describing how an internal Facebook team of 100 engineers has been working with big advertisers to develop their own customized DSPs.

Right off the bat, this revelation is a clear sign that Facebook today does not intend on repeating the anticompetitive tactics used by Microsoft in the mid 1990s.  Back then, Microsoft used its control over the dominant Windows PC operating system to throttle the ability of users to replace Microsoft’s own default browser with a popular third-party browser developed by Netscape.

Notwithstanding the antitrust motivation for supporting independent DSPs, Facebook’s initiative is good from a pure business perspective.  Facebook realizes that improving ROI on purchased ad impressions via reduced information asymmetry translates into a willingness by advertisers to make higher bids for “peaches” instead of “lemons” ala George Akerlof’s iconic economics paper “The Market for Lemons”.

Indeed, we see the current digital ad impression market as the “mother of all markets for lemons”  including the following list of extreme conditions for markets with information asymmetry between sellers and buyers:

  • zero marginal cost on both sides creating lemons and traps
  • dueling artificial intelligence (AI) on both sides morphing sell-side lemons and buy-side traps
  • real-time auctions
  • low latency rendering and fill of ad after purchase of impression
  • double interrelated information asymmetry (see below)

Facebook recognizes that its supply of ad impressions has reached a ceiling due to user annoyance of ads in their feeds.  With supply now inelastic within Facebook, there are three options open to increasing revenue — quantity times unit price.

  • Get into selling impressions outside its “walled garden” which it has done through a retargeting business.
  • Assert its pricing power as a duopolist and just “shift up the supply curve” (i.e. limit ad impressions) which it in effect has done by limiting outside news feeds.

Facebook Option 2: Shift up the Supply Curve

  • Work to “shift up the demand curve” of advertisers by working with independent DSPs to improve ad buy ROI resulting in a willingness to pay higher prices.

Facebook Option 3: Shift up the Demand Curve

Facebook is signaling that it is giving option 3 a try.

Here is a great quote from an April 2017 adExchanger article on digital ad prices as a reflection of quality and the opportunity for Facebook to receive higher prices — shift up the demand curve  — from advertisers and agencies using more discriminating DSPs.

“We buy it cheaper” used to be the lead differentiator in a pitch. Today, agencies that lead with “We can buy digital cheaper” have a sign taped to their back that says, “We buy lots of fraud.” Low prices in digital media are not only no longer a badge of honor, they’re a warning sign.

Here is a quote from the Tech Crunch article on the ROI improvement coming from DSPs built with the assistance of the Facebook engineering team:

Facebook says that on average, clients working with the solutions engineering team see their return on ad spend improve by 100 percent.

The article mentioned that after working with the Facebook team to improve the performance of its own internal DSP,  the mobile game company MZ (formerly Machine Zone),  has spun off its internal DSP as an independent business called Cognant ®.

It should be noted that even before the spin-off, MZ was already the largest “direct response” advertiser in the world and likely on Facebook itself.

As Facebook’s largest direct response advertiser, MZ was the likely first recipient of access to Facebook user data located in “clean rooms” on Facebook servers.  Here is a February 28, 2017 description by AdExchanger of the linkage:

Google and Facebook are each responding to advertiser demands for more data. Facebook does data-sharing deals on the DL with large marketers that push for it.

In so-called “clean rooms,” for example, advertisers can compare their first-party data with impression-level Facebook campaign delivery data using laptops that have never touched the internet. Facebook also allows certain large advertisers to create a private instance on its server to run advanced analytics.

MZ’ DSP is also likely an early adopter of the Unicorn startup Sprinklr for CRM and Martech:

Sprinklr is the most complete social media management system for the enterprise. We help the world’s largest brands do marketing, advertising, care, sales, research, and commerce on Facebook, Twitter, LinkedIn, and 21 other channels globally – all on one integrated platform.

A tight integration of Sprinklr + MZ’s Cognant, especially around real-time brand management (e.g., seeing the impact of localized Facebook ads for McDonald’s garlic fries on purchases at local outlets in real-time)  would certainly be a threat to an earlier generation of cloud-based CRM,  like salesforce.com and Oracle, that draws on dated information.

MZ’s DSP very likely has benefited from face-to-face meetings with the Facebook team located in Menlo Park not more than a 20 minute drive from the MZ’s headquarters in Palo Alto.  Indeed, MZ’s current HQ in Palo Alto on Page Mill Road across from Stanford was the former HQ of Facebook.

It should be noted that MZ is also located close to Google’s HQ  in Mountain View. It will be interesting to see if Google might offer similar assistance.

We would expect Google to lag behind Facebook as Google’s supply of ad impressions is more elastic.  Google can increase revenue via increasing the supply of impressions especially on its YouTube subsidiary.

Facebook has no room in its “wall-garden” for more ad impressions. It will be interesting to see how much Facebook derives revenue from its retargeting business outside its “walled garden.”  Otherwise, the only way Facebook can increase revenue is by working to improve ROI on the demand side and “shift up the demand curve.”

The question is can MZ’s DSP Cognant and maybe a few other DSPs scale sufficiently and demonstrate enough independence to be called true countervailing powers to the Facebook – Google duopoly?

Or will Cognant become a “front” of  independence “playing nice” with Facebook?  Will Cognant become some fake sign of competition to be trotted out by Facebook lawyers in some antitrust lawsuit down the road?

Such an antitrust lawsuit will inevitably dwell on ad price trends as measured by cost-per-click (CPC).  Consider the following graph showing that Facebook’s CPC  rose 136% in the first six months of 2017.

How much of the above trend was due to Facebook asserting it’s pricing power and how much of that trend was due to other factors?

For example, the upward trend could be due in part to a secular improvement in ad ROI delivered by independent DSPs with help of Facebook supplied application programming interfaces (APIs), thus reducing information asymmetry on the part of buyers.

Of course, it takes more than API hooks for a DSP to deliver significant improvements in ad ROI.  It takes a DSP that can build a sophisticated real-time programmatic bid engine and a real-time predictive analytics platform that feeds off Facebook-supplied user data and spits out bids with improved click-through rates.

Right now, we believe that the only independent DSP that has this capability is MZ ‘s Cognant.

In sum, Facebook has deflected the antitrust case against it by assisting independent demand side platforms (DSPs) like MZ’s (Machine Zone’s) Cognant ® to build strong countervailing platforms.


A Startup Street Map of San Francisco 2000-2012

The streets of San Francisco south of Market Street (SoMa) have changed tremendously since the 70s TV cop drama “The Streets of San Francisco” was shot on location. The stars of the show, Karl Malden and a young Michael Douglas, surely would be amazed at the transformation.
The transformation, of course, has been the tremendous growth in high tech startups locating in San Francisco since 2000, the year the new AT&T (then PacBell) ballpark opened in SoMa. Lately, there has arisen a backlash against this growth ranging from bus blocking to paint bombings to blogger bitching about the long lines at Tartine Bakery and Blue Bottle Coffee.

Below is a graphic record of this transformation via an interactive Google map of 1,971 venture-funded startups by street address by founding date between 2000 and 2012. The data comes from a join of two tables in a CrunchBase database made accessible by Enigma.io, a public database infrastructure company.

By linking street addresses to founding dates, we show graphically the flow of startup locations over time, moving early on from South Park up 2nd toward Market and also fanning out over time from AT&T Park South and Southwest toward Market again.

For those who live in San Francisco or who visit regularly, a startup street map of the city is just a graphic record of something we have already sensed. For some, the spreading dots depicted above might look like lava oozing out an erupted volcano – unstoppable and suffocating.

New startups are not a threat to San Francisco’s greatness. There is plenty of cool, albeit gritty, in-fill space available in Mid-Market area near Twitter and Square or south of Mid-Market (SoMMa?) along 8th, 9th and 10th. Dare I mention Dogpatch for those founders who want a “Blade Runner” industrial decay vibe? Locating startups in both areas would enrich city life.


The challenge to San Francisco’s greatness is the explosive growth of the startups already rooted who wish to remain in the city. Some of the notables are listed below. It seem reasonable to assume that about 10 startups among the 1,791 listed our TechCrunch database– less that 1%- will experience at 10-fold increase in the next 5 to 8 years from less than 100 to 1,000+ employees located in the city.

While urban areas like San Francisco make great homes for software startups, it is not clear that the city, or any built-up urban area, can scale well for software startups used to homey in-fill spaces in great neighborhoods like South Park or lower Potrero Hill. Two examples come to mind.

                           Founding Dates of Some Notable SF Start-Ups
StubHub 2000 CrunchBase 2007
Splunk 2003 Lyft 2007
Trulia 2004 Task Rabbit 2008
Digg 2004 Yammer 2008
TrueCar 2005 Rdio 2008
Reddit 2005 GitHub 2008
Twitter 2006 Bandcamp 2008
Justin.tv 2006 Square 2009
Zynga 2006 Pinterest 2009
Eventbrite 2006 Vungle 2011
Marin Software 2006 Circa 2011

Strictly speaking, Dropbox was founded in Massachusetts in early 2007, but relocated to San Francisco shortly thereafter. It has quickly scaled to 650 employees with a decent shot of tripling that in the next five years. To anticipate that growth, Dropbox has moved recently into a sleek office complex with room to spare in Mission Bay, a scorched earth redevelopment area south of AT&T Park.

Mission Bay is large enough to accommodate maybe a dozen Dropbox-like growth companies. But, the area is completely void of San Francisco’s funky charm. Its sterile environment is literally better for what it was originally intended – biotech companies. Working in Mission Bay seems no different than working in Sunnyvale or Pleasanton, appropriate sounding names of bland Bay Area suburbs.

Salesforce.com represents another case study of how a San Francisco startup intends to scale in the city. The company, the pioneer of software as a service (SaaS) business model, was founded in San Francisco in 1999. It has been very successful and by 2011 employs 3,000 in San Francisco, double that worldwide. It is now the largest employer in the city ahead of venerable Levi Strauss and Charles Schwab.

The company reportedly intends to add to its concentration in the Embarcadero area by leasing about 300,000 square feet in the Transbay Tower, a 61 story building now under construct. The Transbay Tower, pictured below, will be the tallest building in San Francisco, surpassing the iconic Transamerica Building.

Is salesforce.com’s SaaS – Software as a Skyscraper — the future of San Francisco? Will a software company replace an insurance company as the name mentioned in jokes about a new iconic symbol for San Francisco?

A Drawing of the 61 Floor Transbay Tower
Source: San Francisco Business Times