The CMA's interim report on online platforms and digital advertising
The UK’s Competition and Markets Authority (“CMA”) released its much anticipated interim report (the “Interim Report”) on its market study into online platforms and digital advertising (the “Market Study”) on 18 December 2019, following the publication of its statement of scope in July 2019 and the collections of responses from key stakeholders later in the year.
The Interim Report is essential reading for all those interested in the state of competition in platforms and digital advertising. It examines the multi-faceted nature of the markets in which platforms operate: on one side, consumers interact with online platforms by providing their personal data, often with a lack of transparency as to how and when data is collected and how it is used; on the other side, platforms acquire funding via online advertising, as to which consumer data is extremely valuable as it allows advertisements to be personalised to each consumer’s characteristics, interests, and browsing behaviour.
As online platforms have grown in user base and capability to become ubiquitous in our lives, so has the volume and nature of user data collected grown. The user now has a more ‘personalised’ experience online, including by being shown advertisements that can now be targeted to an unprecedented degree through processes such as “real time bidding” (“RTB”).
This article provides an overview of the Interim Report’s three themes. The first considers Facebook and Google’s market power in social media and search, including the sources of this power, a breakdown of the structure of the digital advertising market, its segments, and the two platforms’ positions within the same. The second examines consumers’ control over online platforms’ processing and collection of their personal data. The final theme examines competition issues in the business-to-business digital advertising market, where the principal concerns are a lack of transparency caused by the complexity of the “ad tech stack” (as explained further below), and potential conflicts of interest caused by companies involved in advertising intermediation, particularly Google. The article also considers the CMA’s proposed interventions to tackle the concerns raised across the three themes.
Google and Facebook’s market power
The CMA values the UK’s online advertising market at £13 billion, and defines the markets for search advertising and display advertising separately. The CMA describes “search advertising” as a type of advertising where advertisers pay search engines to link their company website to a specific search word or phrase so that it appears in relevant search engine results. Conversely, “display advertising” is where advertisers pay online companies, such as social media platforms, to display advertising using a range of advertising content types shown within defined advertising units on web pages or mobile apps. The CMA identifies the “open display” market as a sub-set of the display advertising market, where advertising is sold programmatically, i.e., the decision on whether to buy a particular impression is made in real time based on the environment (e.g. webpage) and personal information about the user whose attention is being sought.
Google generated over 90% of the £6.4 billion search advertising revenue in 2018, which was to be expected given Google’s dominance in search. The Interim Report describes how economies of scale are a source of Google’s market power, as other search engines lack the volume of data about user searches that could improve their competing search algorithms. Google is also a significant player in the £2 billion “open display” market, where Google provides many of the leading intermediation tools for both publishers and advertisers.
Consumers and their data
A number of the responses to the CMA’s statement of scope highlighted the issue of consumers feeling as though they lack sufficient control of their data. The CMA finds these sentiments to be substantiated and, more broadly, that there are insufficient privacy controls available to consumers.
This is particularly the case when it comes to social media. Social media platforms can hold data that was provided by users during account creation, data collected from user behaviour on the platform, and data such as device information or location (as inferred from an IP address). It appears that the degree of personalisation can be adjusted by consumers, but not turned off. The CMA states that “Facebook and Instagram users cannot turn off personalised advertising. They can, however, see what interest segments they are placed in and manually switch these off, such as removing ads based on a particular football team. Consumers can opt out of seeing ads on other websites and apps that are based on their Facebook activity.” Consumers also are unable to disable the collection of data relating to fields such as friend networks or device attributes.
More broadly, the Interim Report finds that, having surveyed consumer attitudes on control over their data, consumers feel disempowered and without choice as regards data-driven online platforms. Responses to the CMA’s consultation from the Competition Law Forum, as well as Dr Johnny Ryan and Dr Orla Lynskey, argue that these privacy settings provide only an ‘illusion of control’; in reality, users cannot make meaningful choices as to data processing or stop the full extent of data processing which takes place (such as data sharing with third-party advertising vendors).
The CMA notes that Google and Facebook maintain strong positions in their respective markets due to their reliance on consumers’ default behaviour – for example, Google’s agreement with Apple that Google would be the default search engine on the iOS Safari app. The CMA considers Google’s ability to put in place such ‘default agreements’ a barrier to expansion for competing search engines and invites views on a potential intervention to restrict or limit Google’s ability to enter default agreements.
The CMA also finds that platforms’ privacy policies are long, fragmented and presented as ‘clickwrap’ agreements, i.e., as a condition of using the service, the consumer must accept the terms of those policies. Similarly, architecture around user choice, which is designed with a view to discouraging users from making pro-privacy choices, is referred to as “dark patterns.” Aside from the negative impact this has on consumers’ rights (as has been commented upon by Which?), the Competition Law Forum cites Facebook and Google’s use of dark patterns as a reason for their ability to strengthen market power.
Competition in the online advertising market
As above, the CMA finds that Google and Facebook have very high market shares in the search and display advertising markets, respectively. The CMA also finds that search and display advertising are not substitutable because they perform different roles within the customer purchase journey: at a high level, search is intent-based advertising designed to provide immediate answers to those consumers that have already shown an interest in buying the product or service; display advertising is suitable for raising brand awareness and reaching new audiences. The two types of advertising therefore impose little competitive constraint on each other.
The CMA is concerned that the significant barriers to entry preventing any form of effective competition in both markets may be insurmountable. Furthermore, common to both search and display advertising is the CMA’s finding that advertisers and publishers lack the transparency required for them to drive effective competition themselves. The CMA breaks down this concern into the following three issues: (i) the quality and effectiveness of advertising; (ii) how auctions are carried out and how outcomes are determined; and (iii) how intermediaries acting on advertisers’ or publishers’ behalf are remunerated.
In search, the CMA’s current understanding is that Google has several means by which it can exploit its market power and influence outcomes such as the quality and pricing of advertising. For example, due to the opaque nature of the market, Google could currently be exploiting its market power by both designing its auction to more effectively extract economic rents from advertisers, and by selling more advertising at the expense of organic search results. These organic search results are, by their very nature, based on purer assessments of relevance to a user’s query and free from the influence of the price paid by an advertiser to win the right to display the product. This is just one of the many examples described by the CMA in its Interim Report; without greater transparency, it is not possible for advertisers, publishers, or users to gauge the extent to which Google may be exploiting its market power.
Similarly, in the display advertising market, the CMA is concerned that to make informed choices that drive competition, advertisers need to be able to measure advertising outcomes to assess effectiveness and verify the quality of the advertising services that they are receiving. Access to the underlying data that makes these processes of assessment and verification possible is therefore essential. The issue is particularly acute in the case of Google and Facebook, which restrict access to detailed consumer level data in respect of verification for the advertising inventory that they own and operate. Without access to this consumer level data, advertisers are unable to independently verify the effectiveness of their advertising campaigns on Google and Facebook. The CMA’s view is that by maintaining this degree of opacity and asymmetry of information in the market both Google and Facebook are, in effect, able to ‘mark their own homework’ to the detriment of effective competition.
Due to their large datasets, ability to command the attention of users and to track user activity across the internet, Google and Facebook have unrivalled capability to target users with personalised advertising. This capability provides both platforms with considerable power in digital advertising markets – as against competitors, advertisers and, in the “open display” market, publishers. With regard to the open display market in particular, the CMA notes that in order to make programmatic trading of advertising space possible, a complex ecosystem has emerged involving several intermediaries between advertisers and publishers – the so-called “ad tech stack.” Over the past few years, this ecosystem has been going through a process of consolidation and vertical integration. This process has been driven partly by efficiency concerns, and partly in response to pressures resulting from privacy concerns, and the increasing need to reduce the unlawful processing and dissemination of personal user information. In parallel, the CMA suspects that there may be anti-competitive motivations behind the moves by some companies to vertically integrate its intermediation services. Following recent moves to acquire many of the intermediaries in the “ad tech stack,” Google is now present at every stage along the intermediation chain. The CMA is concerned that Google’s positioning of itself on both the ‘buy’ and ‘sell’ side of the intermediation market, and its superior market share at all levels of the “ad tech stack,” raise actual and potential conflicts of interest. For example, Google enjoys a 90% share of the publisher ad server (servers that make the final selection of which advertisement to serve on a particular website) segment of the market  providing it with the means to self-preference its own services at other levels of the supply chain to the detriment of advertisers, publishers and competitors.
The CMA is also concerned that the lack of transparency in digital advertising weakens competition and gives rise to rent-seeking behaviour and arbitrage opportunities. For example, in the open display market, the “ad tech stack” consists of several intermediaries between the advertiser and publishers, neither of whom - according to the CMA - are able to see how much each of the intermediaries are charging. Neither end of the supply chain is able to identify the difference between the amount that publishers receive for their inventory and the amount that advertisers pay. The suspicion in the market is that this price difference may be substantial. Consequently, advertisers cannot make informed decisions as to where to purchase advertising inventory leading to reluctancy to invest, and publishers consequently losing out on potential advertising revenue to fund content, to the detriment of end consumers.
The CMA maintains its view that online platforms funded by digital advertising require an ex ante regulatory regime promoting competition. One potential intervention, as per the Furman review, is a code of conduct for firms with strategic market status ("SMS") – which, although undefined, is said to include both Google and Facebook. The code itself has also not been defined further; instead, the CMA believes it should feature high-level principles, so as not to become obsolete in the face of rapidly evolving technology. The first principle, “fair trading”, would address the concern that online platforms are employing choice architecture, which results in consumers providing more data than they may realise, or that they lack the choice to opt out of personalised advertising. It would also address concerns regarding the information asymmetry between online platforms and publishers, and the power asymmetry in programmatic advertising whereby publishers lack sufficient control as to how their inventory is sold. The second principle, “open choices,” includes recommendations on promoting fair choice of services both for consumers and business customers, for example, by addressing concerns of self-preferencing by vertically integrated platforms in the online display market. The third principle, “trust and transparency,” addresses the concern that publishers are harmed by sudden and unexplained changes in algorithms of search engines and social media platforms, and the concern that online platforms are not doing enough to ensure consumers’ comprehension and control of the data they provide. This principle also addresses the lack of transparency in the ad tech supply chain, and conflicts of interest caused by vertical integration referred to in Theme 3.
The CMA also considered interventions specific to the concerns raised regarding consumers, and seeks views on the same. One possible intervention is to offer consumers the ability to turn off personalised advertising on all platforms. In order to address the competition concerns caused particularly by Facebook’s growth through data acquisition, the CMA also proposes to enforce a default “off” setting on personalised advertising on online platforms with SMS.
The last set of proposed interventions directly target the source of Google and Facebook’s market power. For instance, Google may be required to share some of its search data with competing search engines. It may also be required to separate some of its businesses within the ad tech stack. Facebook may be required to increase interoperability with its competitors, for example, by allowing Facebook users to view posts from other social media platforms, or by giving competitors greater access to Facebook APIs.
What is the CMA going to do?
Despite the volume of findings and recommendations set out in the Interim Report, the CMA does not propose to make a market investigation reference for three principal reasons: (i) so as not to cut across the government’s ongoing “[commitment] to regulatory reform in this area” ; (ii) given the global nature of the dominant positions of Google and Facebook, tackling the issues raised in the report effectively and pragmatically requires further coordination with other national and international regulators; and, (iii) perhaps most importantly, because the CMA is not yet at a stage where it fully understands the nature and extent of the issues in the market.  The CMA has stated that it will revisit its decision not to make a market investigation reference following further consultation with a broad range of market participants and interested parties. Participants in the CMA’s consultative process were asked to submit their views on the findings of the Interim Report by 12 February 2020, with the final report on the CMA’s market study due to be published by 2 July 2020. So far, public responses to the CMA’s consultation have been received from Dr Johnny Ryan,  IAB UK,  the UK trade association for digital advertising, and 51Degrees.  Each of these three responses is critical of the findings of the Interim Report for different reasons and is perhaps indicative of the complex task that still lies ahead for the CMA.
 RTB is a type of programmatic advertising, whereby an automated auction is held for each advertisement served as users load a website on their device. The website attracts bids for advertisement impressions through a “bid request,” which contains user information for advertising personalisation purposes.
 Estimated spend on online advertising in the UK in 2018. This is split nearly halfway between search and display advertising. See Interim Report, p. 9.
 Id., p. 159.
 Id., p 10.
 Id., p. 7.
 See paras. 43-46, Interim Report, App. B, p. B11.
 Id., p. 125.
 Id., App. F, p. F11.
 Id., App. B, p. B13.
 Id., p. 79.
 Id., p. 82.
 Id., p. 246.
 Id., p. 135.
 Control, Alt or Delete? The future of consumer data, Which?, June 2018.
 Note that the CMA’s statement that “[u]nlike search advertising, which is shown in response to specific consumer queries, display advertising is typically unwanted by consumers. See Interim Report, p. 179.
 Id., p. 173.
 Id., p. 184, 186-87.
 Google is said to have “tags” on “nearly 90% of UK websites,” and Facebook on about 50%. Tags may be placed into website code when a website uses Google Analytics or Facebook Like buttons, for instance. See Id., p.15.
 Akin to a supply chain, the ad tech stack refers to the sequence of companies providing intermediation in online advertising (including RTB) between advertisers and publishers. See id., pp. 193-94.
 A trend that could exacerbate the CMA’s existing competition concerns. See id., p. 215.
 Id., p. 197.
 See Id., p. 199, for an informative diagram of Google’s products at each stage of advertising intermediation/the ad tech stack.
 Id., p. 204-11.
 Id., p. 214.
 Id., p. 201-02.
 Id., p. 17-18, 20.
 Id., p. 203.
 Id., p. 22.
 Id., p. 241.
 Id., p. 255.
 Id., p. 244-45.
 Id., p. 247-48.
 Id., p. 277.
 Id., p. 278-79.
 51Degrees’ Response to the CMA’s interim report, 12 Feb. 2020
*Lucy Rigby is Partner, Kio Gwilliam is an Associate, and Adel Msolly is an Intern in the London office.