On 1 July 2020, the UK’s Competition and Markets Authority published its long-awaited final report of its online platforms and digital advertising market study and, in so doing, has confirmed what many have been saying for some time: serious competition concerns exist in this area which are directly impacting consumers by reducing innovation and choice and increasing costs (monetary or otherwise). The CMA is unequivocal that intervention is required to tackle the untrammelled market power of Google and Facebook. However, despite concluding that the statutory test for opening a formal market investigation has been met (confirming the position taken in its interim report), the CMA has declined to do so, instead choosing to pass the baton to government on the basis that legislation is the most appropriate and effective way to deliver a “new pro-competition regulatory regime”.
It’s all about the data
At the outset of its report and, as explained in our previous commentary on the CMA’s study (https://www.hausfeld.com/perspectives/stakeholders-weigh-in-on-the-cmas-interim-report-on-online-platforms-and-digital-advertising), the CMA highlights the pivotal role that digital advertising plays in the provision of online services including internet search, social media and news publishing. Google and Facebook are the giants of the digital advertising world and their business model is one whereby – on one side of the platform – consumers’ attention is captured and their personal data collected and – on the other side – that attention and data is monetized via the platforms’ sale of targeted digital advertising. The CMA’s proposals for increased regulation and intervention is motivated by serious concerns around the gathering and use of user data by Google and Facebook and the impact of this on competition in digital markets.
Consumers suffer from weak competition
The impact on consumers is front and centre in the CMA’s report. This may surprise the average consumer given that Google and Facebook’s services are provided, at least in monetary terms, for “free”. However, the CMA concludes that the advertising-funded business models adopted by both platforms consolidate Google and Facebook’s dominance and that competition in each of the markets for search, social media and digital advertising is weak to the detriment of consumers.
The harmful effects of weak competition manifest themselves in a number of ways:
- First, there is less innovation and, therefore, a likelihood that new products and services, which may be of value to consumers, simply aren’t able to reach the market.
- Second, whilst seemingly “free”, the CMA has concluded that consumers are effectively paying for Google and Facebook’s services indirectly through advertising revenues. The CMA estimates that the true cost amounts to £500 per household and is reflected in inflated prices of goods and services across the UK economy. If there was effective competition in the UK’s digital advertising markets, the CMA considers that the prices of products which make heavy use of digital advertising such as flights, hotels and insurance would be lower.
- Third, the CMA concludes that consumers are being under-compensated for use of their data and for their online attention. In a competitive market, consumers would be offered greater choice as to the amount of data they share with platforms or be rewarded for that data.
- Relatedly, the CMA finds that the lack of competition means that consumers face a ‘take it or leave it’ deal on their personal data, meaning that the dominant platforms offer certain terms on the way personal data is dealt with; and, in order to use that service, the consumer is effectively forced to accept those terms by virtue of the lack of alternative options.
- Lastly, the CMA expresses concern about the wider societal impact of ‘news’ coming from ad-funded platforms rather than authoritative news sources, including the spread of ‘fake news’ and the decline of local newspapers.
Self-reinforcing structural advantages over competitors
In the report, the CMA is clear that “big is not necessarily bad” but where there are significant barriers to entry and expansion, such as in the markets for search and display advertising, these markets are no longer contestable, and have not been for a number of years. Without new entrants or expansion by rivals, Google and Facebook enjoy an unassailable position as the market incumbents. Without competition, Google and Facebook can increase prices, reduce quality and stymie innovation.
The CMA identifies a number of characteristics of digital markets that prevent new entrants from entering the market and can enable companies such as Google and Facebook to undermine effective competition: network effects, economies of scale, maintenance of default settings, unequal access to user data, lack of transparency, the presence of digital ecosystems built around “core” services and vertical integration in advertising supply chains which results in conflicts of interest.
Pro-competition regulatory regime
When it comes to tackling the issues which the report outlines, the CMA concludes that the scale and extent of change required is such as to necessitate, not just a fresh approach, but an entirely new enforcement regime. Specifically, the CMA recommends the creation of a new “pro-competition regulatory regime” comprising two broad categories of intervention. First, the introduction of an enforceable code of conduct applicable to platforms with ‘strategic market status’ to put a stop to the exploitation of users and the exclusion of competitors. Second, a range of pro-competitive interventions undertaken by a Digital Markets Unit, which are designed to tackle the sources of Google and Facebook’s market power.
In accordance with the recommendations of the Furman Review, and in recognition of the fundamental role that user data plays in Google and Facebook’s ad-funded business models, the CMA considers that the following data-related remedies are key to reintroducing competition to digital markets funded by advertising:
- Increasing consumer choices, for example, by restricting Google’s ability to pay to guarantee that it is the default search engine on user devices.
- Increasing consumer control over data by facilitating consumer-led data mobility and ordering Facebook to provide users with a choice as to whether they receive personalized advertising.
- Mandating interoperability, for example between Facebook and other social media platforms, to overcome network effects.
- Mandating third-party access to user data, such as rival search engine access to Google’s click and query data so as to allow them to improve their competing search algorithms, where privacy concerns can be effectively managed.
- Mandating ownership and/or operational separation, where necessary, to prevent conflicts of interest arising from the vertical integration of digital advertising supply chains.
The CMA is unequivocal that there are significant problems affecting competition in digital markets. Google and Facebook occupy unchallengeable incumbency positions in these key markets, to the detriment of competition. The other participants in these markets, advertisers, news publishers and consumers, all stand to lose out as a result.
In undertaking this study and producing its final report, the CMA has made a valiant effort to highlight what are very considerable challenges in important markets. From the perspective of consumers and businesses that are reliant on Google and Facebook’s services, those conclusions and the clarity of the CMA’s language are undoubtedly welcome. It is also encouraging that the CMA is taking a lead in this area, on what are international challenges.
However, many will be disappointed that the CMA is not taking up the mantle of reform itself and is instead ‘passing the buck’ to Government. It is also concerning, particularly from a consumer perspective, that more urgent action is not being taken to address the harms which are detailed in the report. Government consultation and the introduction of fresh legislation will take time, during which period positions of market power will become more entrenched to the detriment of consumers and competitors.