20 July 2020

The Competition and Markets Authority ('CMA') has published its final report on online platforms and the digital advertising market following its interim report last year. The final report concluded that weak levels of competition within this market could lead to harmful effects on consumers, businesses and society, which call for a dedicated regulatory regime as well as a new regulatory body to address the competition concerns in this fast-moving market.

In this article, we highlight the key developments of the final report, the recommendations of the CMA and what it means to the stakeholders in the online platform and digital advertising market.

The CMA’s market study into the online platforms and digital advertising market

In response to the recommendation of the independent Furman review, which highlighted the inadequacy of the existing competition regulations regarding regulation of online platforms, the UK government tasked the CMA to lead a Digital Markets Taskforce to advise on how to take the Furman review’s recommendations forward. As part of this initiative, the CMA launched a market study last July and published the interim report last December.

The interim report reviewed the market power of Google and Facebook and the potential competition issues arising. The CMA did not reach a conclusion on the potentially harmful effects of a distorted market in the interim report. But the CMA did make the case for developing a new regulatory regime and proposed a series of regulatory actions to regulate the behaviours of online platforms funded by digital advertising.

Potential harms to consumers and business users

In its final report, the CMA concluded that, although Google and Facebook’s strong market positions were established due to the quality of their services, their overwhelming market advantages mean that new entrants can no longer compete on equal terms. Such barriers to entry can, in the view of the CMA, lead to substantial harm for both consumers and the wider society.

In particular, in terms of harm to consumers, the CMA concluded that:

  • the lack of competition regarding large online platforms is likely to weaken the incentives of new entrants and reduce overall innovation in the sector
  • due to the market power of large online platforms, consumers may be required to provide excessive personal data in order to use the services
  • the overall lack of competition can lead to lower quality of service, which can further lead to the lack of protection of consumers’ privacy, limit the extent to which the platforms protect consumers from harmful content and misinformation, and limit the extent to which the platforms facilitate a consumer’s ability to distinguish adverts from organic content
  • whilst consumers’ personal data has commercial value, those consumers are not rewarded for their provision of personal data to the online platforms. A similar argument has also been discussed by the Court of Appeal in Google v Lloyd, which we have previously discussed in this article.

Similarly, the CMA concluded that the lack of competition could result in direct harm to business users, in particular:

  • business users being charged higher prices, which ultimately is likely to be passed on to their end-consumers
  • the lack of competition could disincentivise smaller online platform businesses from creating content, including journalism
  • large platforms have been leveraging their market position in their core markets into adjacent markets, which can reduce innovation across the whole ecosystem of online services. For example, in addition to its presence in the search market, Google also has a strong market position in browsers, operating systems and video sharing.

At a wider societal level, the CMA is also of the view that the lack of competition can exacerbate online harms issues already highlighted in the Online Harms White Paper, and dissuade other online news publishers from entering the marketplace which may have detrimental effects on the functioning of democracy and the fight against disinformation.

CMA’s recommendations – pro-competition regulatory regime and regulatory body for online platforms

The CMA concluded that due to the large online platforms’ entrenched market power and the above potential harmful effects, the current regulatory tools are not sufficient to protect competition.

New regulatory body – the Digital Markets Unit

The CMA acknowledged that the fast-moving and complex nature of the online platform and digital advertising market means that effective regulation calls for a dedicated Digital Markets Unit ('DMU'). It is expected that this DMU will be equipped with dedicated resource as well as the power to enforce the proposed Code of Conduct (discussed further below) and intervene to address harmful behaviour. The CMA noted that several countries including Australia, Germany and Japan, are also in the process of establishing such special units.

The report also notes that the DMU could be a new or existing institution, or its functions could be assigned across several bodies. This comment echoes the recent launch of the Digital Regulation Cooperation Forum, which was formed by the CMA, the Information Commissioner’s Office and Ofcom to support regulatory coordination in the UK in the digital market sector. The Forum acknowledges that the three regulators hold different yet overlapping responsibilities.

Pro-competition regulatory regime - Code of Conduct and data-related interventions

The CMA recommends that the government introduces legislation to create a pro-competition regulatory regime tailored for the online platforms market. Similar to the interim report, the CMA proposed both mitigating and ex ante regulatory measures:

  • an enforceable Code of Conduct to govern the behaviour of a small number of large online platforms funded by digital advertising. The Digital Markets Taskforce will make further recommendations to the government in relation to the criteria of determining which platforms should be caught by the proposed Code of Conduct. The CMA also envisages publishing non-binding guidance to help interpret the practical application of the Code. It is hoped that such a Code will ensure that the CMA addresses competition issues more swiftly before they result in actual harm. It is proposed that the DMU should be given the power to compel the provision of information from relevant platforms and carry out investigations stemming from complaints.
  • a series of pro-competitive regulatory powers unique to the online platform market to tackle the source of competition issues, which includes:
    • the following data-related interventions:
      • increasing consumer control over the use of data, especially where social media platforms provide limited choices for users to turn off personalised advertising
      • mandating interoperability of data. For example, Facebook’s various social media platforms can interoperate smoothly in relation to finding contacts and cross posting functionalities. The CMA suggests that Facebook could be required to offer a defined ‘find contacts’ service to third party platforms, without obligations on those third parties to reciprocate
      • requiring third-party access to data where such data is valuable in overcoming barriers to entry. For example, disclosure of Google’s click and query data can allow its competitors to improve their search algorithms
      • mandating data separation to limit organisations’ ability to leverage their market power. Platforms could be prohibited from combining certain categories of data within their ecosystems
    • restricting platforms’ ability to secure default positions (for example default browsers on mobile devices) and instead offer consumers genuine and informed choices
    • introducing different forms of separation intervention, including full ownership separation and operational separation.

Next Steps of the CMA – further advice by the end of the year

The CMA’s provisional conclusion remains that it would not launch a market investigation at this stage, as the proposed regulatory reform would be the preferred way forward to address the competition issues identified. However, if the recommended regulatory reform is not adopted by the government for any reasons, the CMA is likely to take direct action through a market investigation, as the final report notes that the legal test for launching a market investigation has been met. The CMA has powers under a market investigation to impose and legally enforce remedies (which it cannot do under a market study such as this one).

The Digital Markets Taskforce will also continue to advise the government on the practical application of the pro-competitive measures proposed, including the detailed scope of the proposed regulatory regime. Following a call for industry inputs, the Digital Markets Taskforce is expected to provide such advice by the end of the year. It is therefore possible that we will see the introduction of the new regulatory regime and the DMU as early as 2021.

Implications of the report on businesses – online platforms and beyond

As we mentioned in our review on the interim report, the regulatory scrutiny into the digital services market from other UK regulators, such as the ICO and Ofcom, and at the European level is likely to continue (see our article on the European Commission’s consultation on a new market investigation enforcement tool here). Online platforms funded by digital advertising can therefore expect more intense regulatory oversight in the next 12 months in relation to data protection, competition and consumer protection issues.

In the medium term, as regulators develop their expertise in the online platform sector, the new regulatory regime and some of the proposed data-related interventions could be applied to other data rich industries. The CMA has indeed confirmed in the final report that some of the interventions to improve consumer control over data could apply to a broader range of market participants in the future.

The series of data-related interventions proposed also shines light on the future of regulation of data. Previously market data held by a business was largely viewed as the private asset of that business. How businesses obtain such data received limited regulatory attention with the exception of GDPR. However, the growing deployment of artificial intelligence has led to concerns that businesses holding significant data could potentially reinforce their market power and create barriers to entry for their competitors. It is not inconceivable that in the future data could also be viewed as a type of public resource and part of our digital infrastructure. If that is the case, businesses, especially those in the digital services sector, can expect more complex regulations on how they collect, use, disclose data and how such practices are explained to consumers.

If you would like assistance with your data protection and competition matters, please contact our Data Protection team and our Competition team.

This article was written by solicitor Yunzhe Zhang.

Key contact

Chris Worrall

Chris Worrall Partner

  • Head of Competition
  • Mergers and Acquisitions
  • Financial Services

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