26 February 2020

Regulatory scrutiny of the digital advertising market

In the past decade digital platforms have become an integral part of modern life. Many of the platforms are in themselves ‘free’ in monetary terms, however consumers pay for the services with their attention and personal data. Online platforms can then monetise the data collected via online advertising, which according to the CMA, has become a substantial majority of the revenue for many online platforms.

The growing influence of online platforms and digital advertising has caused various competition concerns. The independent Furman review in the UK and the Stigler Center review in the US highlighted the inadequacy of existing competition law enforcement tools in this sector. Both reviews call for new regulatory approaches to be adopted. Many private and governmental organisations have therefore called upon the CMA to review the existing regulatory regime.

In July 2019, the CMA published its Digital Markets Strategy and launched a market study into online platforms and digital advertising. The CMA published its interim report on the market study in December 2019, with the final report due on 2 July this year. Consultation on the interim report closed on 12 February.

Key findings of the interim online platform and digital advertising report

The CMA’s study focused on the following three areas:

  • To what extent do Google and Facebook have market power in search and social media markets respectively and the sources of this market power

The CMA found that more than 90 per cent of UK search traffic was generated by Google over the past ten years. In the display advertising market, Facebook has a reach of 85 per cent of UK internet users and 40 per cent of the market share in the UK. Google’s market position means that it has significantly more data than its competitors, especially data of new or uncommon queries, which help improve its algorithms.

Advertisers are also more attracted to search engines with a higher volume of users. Similarly, Facebook and Instagram benefit from economies of scale as the value of joining a social media platform is increased when more users join. The CMA noted that being ‘big’ is not necessarily ‘bad’ but high market shares could cause barriers to entry.

  • Whether consumers have adequate control over the use of their data by online platforms

Data allows online platforms to tailor advertisements to consumers and to attract digital advertisers.

In an era where time is increasingly scarce, the CMA found that most consumers accept the default privacy setting of social media platforms and the default search engine installed on their devices. Consumers who would like to change the default settings often find the process difficult to navigate. Google and Facebook are therefore able to collect more data from users with less effort and provide accurate profile of individuals, which are more valuable to advertisers.

In addition, the CMA considered that both technology giants’ online tags, an analytical technology placed on third-party websites and apps to trace users’ online actions, are placed on most UK websites. Google and Facebook are thus more adept at demonstrating to third party advertisers the effectiveness of advertising on their platforms.

Interestingly, the CMA also commented that large vertically-integrated platforms may have an easier time when obtaining consumer consent for data processing. These platforms may be able to claim that data is only shared within the organisation. The CMA intends to engage with the Information Commissioner’s Office in the second half of the study to explore practical ways to balance the protection of personal data and competition.

  • Concerns in relation to a lack of transparency, conflict of interest and the leveraging of market power in the B2B digital advertising market

The CMA found that sudden changes to Google search and Facebook News Feed algorithms can lead to significant reductions in traffic to some publishers, who find it difficult to understand the change or to challenge the decision made by the algorithms. The CMA considered that asymmetric access to information means that market participants are less able to make informed and effective decisions and suppliers are more likely to be able to overstate the quality and effectiveness of their advertising inventory.

The CMA also found that Google controls substantial shares in both the sell side and buy side of the advertising intermediation value chain, potentially giving rise to conflicts of interest. Although the CMA is yet to reach a conclusion on the anti-competitive effects of such conflicts.

Potential Interventions

At this stage the CMA has not reached a final conclusion on any potentially harmful effects of Google and Facebook’s market power, noting that some evidence such as relatively higher pricing of the two companies could be due to quality. However, the CMA considers that there is a strong argument for the development of a pro-competitive regulatory regime to address the concerns arising from its findings. Proposed regulatory actions include:

  • Enforceable code of conduct

The CMA envisages that a Code of Conduct setting out high-level principles may be helpful to supplement the existing competition regime and address a number of concerns identified. An expert body would be required to enforce the Code.

  • Rules to improve transparency and give users greater control over data

To encourage consumers’ engagement with privacy settings and policies, the CMA is considering requiring relevant platforms to change default settings for personalised advertising and to design consent and privacy policies in a way that facilitates informed consumer choice. The CMA also suggested that all platforms should be required to give consumers an option to use their services without requiring in return the use of consumer data for personalised advertising, which would fundamentally change the business model of many online platforms.

  • Interventions to address sources of market power and promote competition

In this area the CMA envisages new rules to require the disclosure of certain information essential for the effective working of digital advertising. Increased interoperability, industry standard and regulatory audits are the other measures that the CMA considers to be beneficial for the sector.

  • Other interventions to address sources of market power and promote competition

The CMA may also consider measures such as requiring Google to provide click-and-query data to its competitors, restrictions on Google’s ability to contract with mobile phone and other electronic device companies to set Google as the default search engine, or choice screens allowing consumers to choose default search engine at installation stage. However the CMA has acknowledged that it would consider such interventionist approach carefully.

Implications of the interim report

The Department for Digital, Culture, Media & Sport (‘DCMS’) has recently launched a call for evidence to consider how online advertising is being regulated with a view to foster fair and accountable online advertising. The DCMS study will supplement the findings of the CMA, the Centre for Data Ethics and Innovation and the Information Commissioner’s Office. The increased regulatory attention appears to indicate that a specialist regulator in UK’s digital services sector could be on the horizon. With many global technology giants calling for a single European oversight body, the EU may also create a Europe-wide technology regulator.

Whilst the CMA’s report focused on the market behaviour of Google and Facebook, it is relevant to all those in the online advertising sector. Google, Facebook and their competitors and intermediaries may find themselves required to put in place certain measures to protect consumers by default.

Regulatory intervention may create new industry standard and codes of practice, which may shift more power to individual consumers in relation to data collection and processing. Platforms may in turn see a rise of consumer challenges and queries as consumers become more aware of the targeted advertising practice.

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

This article was written by Yunzhe Zhang.

Key contact

Cheryl Parkhouse

Cheryl Parkhouse Senior Associate

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