On 18th December the UK Competition and Markets Authority (CMA) published its interim report ‘Online platforms and digital advertising’ following a market study launched in July 2019 to address concerns surrounding the power of online platforms in consumer facing markets and the lack of consumer control over the use of their data[1].

In recognition of the strength of each of Facebook and Google in the digital advertising market, the CMA is proposing a number of interventions. These proposals include an enforceable code of conduct applying to platforms with strategic market status, proposals for a duty of fairness for platforms to ensure default data settings are consumer friendly and various interventions aimed at tackling market power.

The report addresses many of the same issues raised in the Furman review[2], an independent investigation led by Barack Obama’s former economic advisor Jason Furman. Significantly, this is the first report published by the CMA including proposals that harmonise with Furman’s envisaged structural change. It also comes in the wake of a year where digital regulation was very much the issue du jour with both sides of the Atlantic putting forward proposals, the European Commission Expert Committee in April[3] and the Stigler Center[4] in September.

Search and social

Unsurprisingly, the report points to Google’s pre-eminence in general search for both mobile and desktop search functions. Whilst recognising that innovation has played a part in the rise of Google, it notes that significant barriers exist to entrants planning expansion into the market. Like most multi-sided platforms, economies of scale are a key factor in assessing significant market power. Both web-index development (indexing the contents of multiple websites to render them searchable) and click-and-query data (data available to train your search engine to produce more relevant results) are highly scalable and this engenders a chicken-and-egg problem whereby consumer traffic is needed to produce a better search engine but a better search engine is needed to attract consumer traffic. Syndication agreements, such as Yahoo Search, DuckDuckGo and Ecosia relying on Bing’s organic results, appear to represent a fringe source of competition.

Facebook continues to be identified as the leading force in social media with evidence suggesting that none of the platforms currently active in the UK’s social media sector appear to impose a strong competitive constraint. Due to its cross-platform capability, with offerings including Facebook.com and Instagram, consumers are unlikely to be able to replace Facebook’s services with another platform unless it can offer access to at least some of these components. Multi-homing, where users are tempted to switch to a new site but retain a presence on both platforms to hedge their bets, is a method recent entrants appear to be encouraging in order to compete. However, the report notes that there has been no successful entry in the last 10 years by a platform competing directly with a comparable set of services to those provided by Facebook.com. Monetisation is also an issue for new entrants, with a ‘critical mass’ of users needed for success. If Facebook is able to leverage its market power to raise the prices its charges display advertisers to above competitive levels, there is a concern that this may ultimately be passed on to consumers.

Know your data

Reflecting the recommendations from Furman, the report is in favour of transparency in its approach to data. It takes the view that consumers should know how data is collected, how it is used, and should find it easy to choose to accept or reject the terms presented. Whilst the transactional aspect of trading data for free or improved services is accepted by consumers, the initial analysis set out in the report reveals that consumers are mainly in the dark about how their data is harvested and used. Factors such as default advertising and data settings (which consumers are unlikely to change), limited control over data settings, complex terms and conditions and low engagement with privacy settings all support this. The report recommends ensuring that default settings are providing the protection for those that need it, whilst maintaining consumer choice for those who have a higher level of engagement.

Digital advertising

Distinct from traditional advertising, digital advertising uses data to target specific audiences and to assess outcomes. Advertisers use a number of measurable KPIs (key performance indicators) from general awareness (number of views) to engagement (number of clicks) to conversion rates (number of sales). Broadly all advertiser competition is for consumer attention but within digital advertising different forms of adverts serve different purposes, with distinct silos such as search, display, classified advertising, video and non-video limiting the degree of market power that platforms can exercise over advertisers.

Again, Google is singled out in the report as a significant player. With its search dominance, Google is viewed as a ‘must-have’ channel by advertisers and is able to leverage its data to provide higher-quality analytics, further increasing the value of the advertising in a way that is very hard for other smaller search providers to compete with. In display advertising a significant majority of advertising revenues go to a small number of platforms and the large platforms have an important data advantage. Facebook and Instagram jointly account for nearly half of display advertising revenues and YouTube (owned by Google) is a significant seller in video advertising.

Smaller online publishers wishing to monetise their content through advertising have to sell inventory through the open display advertising market. This brings into play a complex structure of intermediaries who provide auction services such as RTB (real time bidding). The report notes that this market has been consolidating, largely through acquisitions over time, in a bid to drive efficiency. It also notes that Google has a particularly strong position in ad-tech, with its position as an intermediary providing services to both publishers and advertising raising potential conflict of interest issues.

Interventions

The report proposes two categories of intervention; a code of conduct governing behavioural infringements and several individual interventions targeted at specific concerns that aim to solve problems at source.

The code would apply to certain firms with a designated ‘strategic market status’ (SMS). Whilst SMS is not explicitly defined in the report, criteria include ‘enduring market power’, acting as an ‘important gateway for business’ and business dependence on the platform to access the ‘other-side of the market’ i.e. consumers. Both Google and Facebook are named as being likely targets with a note that other platforms may be considered when examining their role in markets outside the scope of the study. Regarding enforceability, the study envisages some form of dedicated regulatory body to enforce it, consistent with Furman’s ‘Digital Markets Unit’ or the Stigler Center’s recommended ‘Digital Authority’ in the US.

The code itself would follow three high-level principles; fair trading, open choices and trust and transparency. ‘Fair trading’ would prevent consumers from being required to give unnecessary data, mandate a ‘fairness by design’ obligation in relation to consumer consent and place a limit on unreasonable restrictions on users. ‘Open choices’ protects users’ ability to choose freely between elements of different platforms – this area of the code would focus on anti-bundling and self-preferencing, preventing restrictions on users who use other services and an emphasis on technical interoperability. Finally, ‘trust and transparency’ conduct rules would involve requirements to explain the operation of search and ranking algorithms and to inform users of any changes, requirements to provide clear information to users about the services they receive and the data they give in return and require SMS firms to agree to reasonable requests for access to data.

Potential interventions mirror the tenets in the code above. Suggestions aiming to curb market power in search would require Google to provide data to third parties or join mandatory syndication agreements on FRAND (Fair, Reasonable And Non-Discriminatory) terms. Additionally, limits may be placed on Google’s ability to buy positions as the default web browser for devices, which is especially relevant in the wake of the European Commission’s Android case. Regarding social media, as with the code, the study considers the extent to which increased interoperability would improve outcomes and recommend opposition to limitations on users’ ability to multi-home. More interventionist measures, such as a structural separation of Facebook.com and Instagram, are also considered, however it is acknowledged that there is a risk this would only deliver short term benefits before the market tips back to one supplier.

What’s next?

The CMA will consult on the report’s findings until 12 February 2020. Significantly, due to the report’s belief that recommendations for government legislation in this area are likely to be one of the most valuable outcomes, the second half of the study will involve engagement with the newly-elected government to understand its perspective on these issues. At this stage the CMA is not minded to propose a market investigation reference but rather is favouring recommending regulatory reform directly to the government. The decision to leapfrog the full investigation no doubt stems from the extensive research already conducted into digital markets. Armed with the recommendations from the Furman Review and the findings from this study, the CMA have recognised that a “one-off” intervention, such as would arise from a market investigation, is unlikely to provide a sustainable long-term framework for the sector. The government has already indicated its appetite for and that will no doubt embolden the CMA to favour legislative solutions.

The final report will be published by 2 July 2020.