Festina lente (make haste, slowly): the CMA takes steps towards regulating online platforms
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 (CMA Final Report). In so doing, it has confirmed what many have been saying for some time: serious competition concerns exist in this area which are directly impacting consumers, competitors, and wider society.
The CMA is clear that intervention is required to tackle the market power of “Big Tech” companies. 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 at this time, instead choosing to pass the baton to government on the grounds that legislation is the most appropriate and effective basis upon which to deliver a “new pro-competition regulatory regime,” adding that a specialist “Digital Markets Unit” is required to enforce that regime.
It may be reasonable for the CMA to suggest that such complex and fast-moving markets might justify dedicated specialists to police digital markets effectively, to ensure that regulatory activity serves to promote competition and consumer welfare and does not inadvertently inhibit those aims. Nevertheless, the staged approach recommended in the report means that the digital platforms will not only have considerable scope for influencing the further legislation that is recommended, in particular the specific codes of conduct that will ultimately be applied to platforms with so-called “strategic market status,” but also that meaningful regulatory interventions in digital markets in the UK may be years away.
The scope of the CMA’s analysis
The CMA has carefully set out its analysis in a comprehensive 437-page report (1,800 pages, including the appendices). Indeed the length of the report is such that the CMA’s chief economic adviser has remarked that the report is longer than Tolstoy’s “War and Peace” (and includes better plot twists).[1] At the outset of its report and, as explained in our previous commentary on the CMA’s study, 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 its serious concerns about 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 in digital advertising markets
The impact on consumers of the structure of digital advertising markets is front and centre in the CMA’s report. This may surprise the average consumer given that many likely perceive 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, as we explore below.
First, however, it may be helpful to unpick the CMA’s conclusions as to the structure of the digital advertising markets and Google and Facebook’s place within them. The UK digital advertising market, which was worth £15.7 billion in 2019,[2] is divided into the non-substitutable markets for search[3] and display advertising.[4] Google generated over 90% of UK search advertising revenues in 2019, owing to its 90% share of UK search traffic.[5] Facebook generated over 50% of UK display advertising revenues in 2019.[6]
A. Harm to innovation and quality
Weak competition usually leads to a lower rate of innovation and, therefore, a likelihood that new products and services, which may be of potential value to consumers, are simply not able to reach the market. This is a significant concern for the future development of technology in this area.[7] Google and Facebook’s market power, upon which the CMA elaborates in Chapters 3 and 5 of its Final Report, respectively, has resulted in insurmountable barriers to entry.[8] As such, Google and Facebook do not face competitive pressure to develop and offer innovative products to their consumers.[9] Further, the CMA Final Report highlights a number of concerns that the two tech giants have attempted behaviours that actively harm their competitors; for instance, Facebook’s suggested degradation of third-party access to its APIs,[10] and Google’s purported leverage of its market power in general search to self-preference its Google Flights specialized search engine over competitors.[11]
Aside from stifling innovation, the CMA finds that Google and Facebook are not subject to competitive pressure to maintain the quality of their products. For example, according to the CMA, increasing the number of advertisements served on an online platform lessens the quality of the service provided, because user attention is diverted from the core service. If there was meaningful competition to platforms such as Facebook or Instagram, users would be able to choose platforms that served users fewer advertisements.[12]
B. The impact of digital advertising on the wider economy
Additionally, whilst, as noted above, many consumers do not perceive of themselves as “paying” to use Google or Facebook, the CMA concludes that consumers are indirectly paying for Google and Facebook’s services through prices for goods and services which are higher due to increased spend by retailers on advertising. The CMA estimates that the true cost of digital advertising in 2019 amounted to £500 per household; this amount is reflected in the inflated prices of goods and services across the UK economy.[13]
C. Consumers are under-compensated for their data
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 would be rewarded for that data. For instance, Facebook made £50-60 per user from personalized advertising in 2019.[14] Although the CMA considers that consumers will not make identical assessments of the value of their data collected by online platforms, it concludes that consumers lack the knowledge to decide in the first place.[15] The excessive levels of profitability of the platforms are relevant in this regard.[16] In 2018, according to the CMA, Google and Facebook together earned over £2 billion more than what would be expected to fairly reward their investors.[17]
D. Consumer control over data
Relatedly, the CMA finds that Google and Facebook’s market power leads to a lack of meaningful control for consumers over their data:
- First, they do not allow users to opt out of personalized advertising, which relies on browsing behavior and personal characteristics of the user to target the advertisements displayed to them. Alternatively, they opt users into personalized advertising by default;
- Additionally, privacy controls are difficult for users to access, reinforcing the power of default settings. The choice architecture further deters users from making privacy-enhancing decisions; and
- The majority of consumers do not meaningfully engage with privacy policies. Where users do engage, they are met with complicated and lengthy texts, which users could not be reasonably expected to read and understand.[18]
E. Harmful effects on publishers and news media
Among the “broader social harms”[19] arising out of the competition issues identified in the CMA Final Report is the sustainability of quality journalism; in this regard the CMA follows the findings of a government publication, the Cairncross Review.[20] News publishers are largely reliant on Google and Facebook as the sources of traffic to their websites through appearances in search results and social media feeds, respectively. The CMA’s analysis finds that Google and Facebook account for between 36% and 38% of total traffic to some of the UK’s largest publishers.[21] It follows that the tech giants’ role is effectively content curation and promotion of brand awareness.[22] According to the CMA, many publishers have expressed a concern that Google and Facebook take this one step too far by “free-riding” on their content, monetizing it on Google and Facebook’s own user-facing platforms, and reducing publisher revenue.[23] The CMA identifies a number of issues with the unequal bargaining power of the two platforms:
- Both search and social media rely on algorithms to order the appearance of content on search engine results pages (SERP) and news feeds, respectively. According to the CMA, Google and Facebook are not constrained by their competitors from changing their algorithms; even a small change may result in a publisher’s disappearance from the top of the SERP, with significant financial consequences to the publisher due to loss of website traffic.[24]
- Both Google and Facebook have developed mobile-friendly formats for displaying publisher content (Google’s AMP and Facebook’s IA). The CMA highlights the concern that these formats share browsing data with Google and Facebook, whilst other mobile-friendly publishing formats do not. Google is able to leverage its market power to compel publishers to use the AMP format as it confers an advantage to news stories appearing in the News Carousel,[25] a rich graphic display on the top of the SERP. Similarly, the information asymmetry perpetuated by big tech companies is apparent in the publishing context; while publishers are only able to collect information about users visiting its website, Google and Facebook collect information both from their user-facing services, and from tags and pixels placed on publisher websites.[26]
- According to the CMA, publishers’ competitive positions are further weakened by the fact that digital advertising is a key revenue stream nowadays (as an alternative to paywalls). To the CMA, the broader impact of the unsustainable environment for publishers, created by Google and Facebook, is a reduction of the incentive to invest in quality journalism, which contributes towards the spread of fake news.[27]
F. Self-reinforcing structural advantages over competitors
In its Final Report, the CMA is clear that “big is not necessarily bad.”[28] It stresses, however, that when there are significant barriers to entry or expansion, such as those in the markets for search and display advertising, the markets are no longer contestable, and have not been for a number of years.[29] Specifically, without new entrants or expansion by rivals, the CMA finds that Google and Facebook enjoy an unassailable position as the market incumbents. Without competition, Google and Facebook can increase prices, reduce quality and stymie innovation.[30]
As next summarized, in its Final Report 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.
With regard to the market for search services specifically, the CMA notes that in order to compete with Google and deliver relevant results to a wide range of queries, rival search engines need access to a high volume of consumer queries, click-and-query data and an extensive web-index.[31] Google’s scale enables it to iterate quicker, maintain a lead on search relevance and therefore monetize its search service more effectively than rivals. Following such effective monetization, the CMA finds, Google is able to reinforce its own structural advantage by paying more than rivals for the extensive default positions that it enjoys, particularly in the Chrome browser and on Apple and Android mobile devices, which, in turn, helps it maintain high query volumes.[32]
In contrast, the CMA finds that smaller rivals struggle to improve the quality of, and therefore monetize, their competing search services. The Final Report identifies numerous harmful effects that are at increased risk of occurring because of Google’s untrammelled market power in search. First, the incentive for Google to improve its service in the interests of consumers is weakened, resulting in, for example, increased “ad load” where more paid ad results and fewer purely relevance-based organic results are presented by Google on its search results page in response to user queries.[33] Second, without competitive threat, Google can force users to provide disproportionate amounts of personal data as a condition of using its service.[34] Third, Google can increase search advertising prices above competitive levels which may increase the prices of goods and services.[35] The CMA finds that, compared to Bing’s search prices, Google’s prices are on average 30-40% higher on desktop and also on mobile. The CMA states that this empirical finding is consistent with Google exploiting market power in its search auctions.[36] Fourth, according to the CMA, Google is able to leverage its market power in general search into related markets, such as specialized search services, thereby excluding efficient rivals that would otherwise provide valuable complementary services to consumers. One clear example that the CMA provides of Google leveraging its market power is by placing “One-Boxes” on its main SERP that link users to its own specialized search sites, such as shopping, news and local search, rather than to the competing specialized search services of rivals.[37]
With regard to the market for social media services, the Final Report analyses the extent to which Facebook benefits from two types of network effects -- “same-side” and “cross-side” network effects[38] -- and is able to foreclose the market for open display advertising as a result. Same-side network effects arise when a communications platform becomes more valuable to consumers if other consumers with whom they want to interact join the platform. Cross-side network effects arise when a platform’s value to a consumer increases as a result of an increase in the number, diversity, and quality of “customers” active on the other side of the platform, and vice versa. By “customers,” the CMA refers to content providers, third-party app developers, and advertisers, who are all drawn to the platform’s high numbers of consumers and help the platform monetize itself by providing access to those consumers. The CMA considers that such same-side and cross-side network effects act as a barrier to entry and expansion to smaller platforms and enable Facebook to self-reinforce its market power in both the market for social media and display advertising.[39]
It is notable from the CMA’s point of view that rivals’ strategies in the social media market appear to make no attempt to build and compete with a service comparable to Facebook’s “network for everyone you know".[40] The CMA states that the failure of Google+ to enter the market in 2011 demonstrates that even with Google’s wide base of potential users and consumer data, it is not possible for it to enter the social media market and compete with Facebook to provide such a service.[41] As a result of rival social media providers’ differentiated strategies that complement rather than directly compete with Facebook, the CMA concludes that Facebook has very few competitive constraints on the other side of the market where Facebook users’ attention and data is monetized via the platforms’ sale of targeted digital advertising. The CMA identifies numerous harmful effects that are at increased risk of occurring as a result, including: on one side of the market, weaker incentives for Facebook to innovate and to develop its platform to the benefit of consumers and the disproportionate extraction of user’s personal data; and, on the other side of the market, the imposition of supra-competitive prices charged to advertisers which are passed on via increased prices paid by consumers for goods and services.[42] Notably, despite Facebook’s Mark Zuckerberg stating in internal documents recently disclosed to the US Congress that, at the time of Facebook’s acquisition of Instagram, Instagram was a competitor,[43] the CMA maintains a position that Instagram was not a competitive threat to Facebook at the time of the Office for Fair Trading’s review of the Facebook/Instagram merger.[44]
Proposals for reform
When it comes to tackling the issues which the Final 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, it urges the introduction of an enforceable code of conduct applicable to platforms with ‘strategic market status’ (SMS) to put a stop to the exploitation of users and the exclusion of competitors. Second, it suggests a range of pro-competitive interventions undertaken by a Digital Markets Unit (DMU), designed to tackle the sources of Google and Facebook’s market power.
In recognition of the fundamental role that user data plays in Google and Facebook’s ad-funded business models, the CMA considers the following data-related remedies as 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.
Although the remedies proposed by the CMA have the potential to address the harms discussed above, their implementation would not be straightforward, both in terms of practicalities and timing. The code of conduct for platforms with SMS would first be opened for input by the platforms themselves. Only then would the DMU, once constituted, be able to enforce the code and apply the remedies. As such, Facebook, Google, and potentially other Big Tech players would have considerable influence on the framework for application of the CMA’s proposed remedies. This might raise concerns that any enforcement of the new pro-competitive interventions would be subject to significant delays; in the meantime, dominant tech platforms would remain largely unconstrained in their harmful conduct.
It is worth noting that alongside the DMU the UK Government has, in response to the Furman Review,[45] commissioned a Digital Markets Taskforce led by the CMA, including representatives from Ofcom[46] and the ICO.[47] The Taskforce’s remit is wider, looking at a variety of online platforms with different funding strategies (such as digital marketplaces, which are funded by commissions from transactions rather than advertising) and its range of powers is weaker compared to the DMU’s; for example, the Taskforce lacks formal evidence-gathering powers.[48] The Taskforce has recently concluded its call for information on the functioning of digital platforms, and will provide advice to the Government by December 2020.[49]
Conclusion
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.
The CMA is unequivocal that there are significant problems affecting competition in the digital markets. Google and Facebook occupy unchallengeable incumbency positions in these key markets, to the detriment of competition. Consumers in particular are harmed by consequent reductions in service quality and the rate of digital innovation, under-compensation for their data, and the effects on the wider economy, including the social harms resulting from a decline in quality journalism. The other participants in these markets, advertisers and news publishers, also stand to lose out as a result. The CMA explicitly acknowledges the issues specific to the journalism industry and builds on the findings of both the Cairncross Review on the sustainable future for journalism and the Furman Review.[50]
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, despite appearing to have the power to take more immediate steps via a market investigation. It is also concerning, particularly from a consumer perspective, that more immediate action is not being taken to address the harms detailed in the Final Report. Government consultation and the introduction of fresh legislation will take time, during which positions of market power are likely to become yet more entrenched, to the detriment of competitors and consumers alike.
Footnotes
[1] See MLex Comment: UK CMA faces enforcement gauntlet over Google's adtech 'self-preferencing', 10 August 2020.
[2] CMA Final Report, para. 2.40.
[3] Text-based advertisements served on SERP.
[4] Rich graphic advertisements served either on online platforms (e.g. Instagram, YouTube) (so-called “owned & operated”) or on third-party websites (so-called “open display”).
[5] CMA Final Report, para.18.
[6] id., para. 19.
[7] Id., para. 6.8
[8] Id., para. 6.5 and 6.6
[9] Id., para. 6.8
[10] Application programming interfaces
[11] CMA Final Report, Box 6.1
[12] Id., para. 6.14.
[13] Id., para. 6.21.
[14] Id., para. 10.
[15] Id., para. 4.119.
[16] Id., para. 6.26.
[17] Id., paras. 6.28, 6.29.
[18] CMA Final Report, Table 4.4, paras. 4.84-4.108.
[19] Id., page 318.
[20] https://www.gov.uk/government/publications/the-cairncross-review-a-sustainable-future-for-journalism
[21] CMA Final Report, para. 5.363.
[22] Id., para. 5.362.
[23] Id., para. 6.37.
[24] Id., para. 5.365.
[25] Id.
[26] Id.
[27] Id., para. 6.42.
[28] Id., para. 20.
[29] Id., para. 20.
[30] Id., para. 20.
[31] Id., para. 3.147.
[32] Id., para. 3.149.
[33] Id., para. 5.94.
[34] Id., para. 3.151.
[35] Id., para. 3.151.
[36] Id., para. 5.90.
[37] Id., para. 3.129.
[38] Id., para. 3.203.
[39] Id., para. 3.205.
[40] Id., para. 3.253.
[41] Id., Box 3.7.
[42] Id., para. 3.257.
[43] https://www.theguardian.com/technology/live/2020/jul/29/tech-congress-hearing-zuckerberg-bezos-cook-facebook-amazon-apple
[44] CMA Final Report, Box 3.6. The Office for Fair Trading (OFT) is the CMA’s predecessor, and approved Facebook Inc.’s acquisition of Instagram Inc. in 2012: https://assets.publishing.service.gov.uk/media/555de2e5ed915d7ae200003b/facebook.pdf
[46] The Office of Communications; the UK’s regulatory and competition authority for the broadcasting, telecommunications and postal industries.
[47] Information Commissioner’s Office; the UK’s data protection authority.
[48] CMA Final Report, para. 10.7.
[49] https://www.gov.uk/cma-cases/digital-markets-taskforce
[50] CMA Final Report, paras. 7.90-7.93.
*Luke Streatfeild is Partner, Lucy Rigby is Partner, Kio Gwilliam is an Associate in the London office.
