Australia: Media and advertising markets. Smoke but no fire? Competition enforcement after the ACCC Digital Platforms Inquiry

The Digital Platforms Inquiry (DPI) arose from a Ministerial direction to the ACCC to investigate the state of competition in media and advertising markets. In both the Preliminary and Final Reports, the ACCC concluded that both Google and Facebook have substantial power in various markets – but was essentially silent about potential abuses of that market power.

The ACCC makes no concession that the reason it identified little or no specific anticompetitive conduct during its 18-month inquiry was that there were no problems to be found. Nor does it argue that Australia's market power laws are insufficient for the task. Rather, the ACCC's explanation appears to be that digital markets are so complex (and important) that more sustained and proactive investigation is required to uncover latent competition problems.

We discuss below the scope of the competition assessments in the ACCC's Final Report, the reasons for some of the gaps in the ACCC's analysis, and how the ACCC intends to fill them.

Market power findings

The Final Report concluded that Google has substantial market power in the supply of online search and online search advertising. Around 95% of online searches are performed through Google and Google earns almost 96% of Australia's online search advertising revenue.

It also found that Facebook has substantial market power in the supply of social media services and online display advertising. Facebook's audience is over three times larger than its closest competitor Snapchat's, and Facebook's and Instagram's combined share of online display advertising is around 51% (with no other player higher than 5%).

The ACCC backed away from its conclusion in the Preliminary Report that Google and Facebook had market power in 'news media referral' services – finding instead that they have substantial bargaining power with news media businesses, but declining to express a concluded view that digital referrals constitute a market.

Data accumulation

The ACCC specifically identified the accumulation of data by the digital platforms as key to their business models and as a significant barrier to entry and a source of their market power. The data held is valuable because of its scale, scope, quality and accuracy.

The popularity and the breadth of the platforms' services (e.g. Google across Search, Gmail, Maps, Android and YouTube and Facebook across Instagram, Messenger and WhatsApp) were said to enable them to build particularly valuable datasets and offer highly targeted advertising opportunities. The advertising revenue generated enables the platforms to invest in functionality and services, and so the breadth and depth of their ongoing data collection reinforces their market power.

Dynamic competition

The ACCC also found that the digital platforms were insulated from 'dynamic competition' (i.e. the threat of entry and disruption enabled by innovation), as same-side and cross-side network effects,1 strong brands, consumer inertia and 'default bias', switching costs, economies of scale and sunk costs act as barriers to entry and expansion.

The ACCC concluded that large-scale entry in competition with Google or Facebook is unlikely to occur at least in the short- to medium-term. Interestingly, the ACCC suggests that Google's market power is likely to be more durable than Facebook's, as same-side network effects may not preclude the entry of smaller social media rivals that appeal to specific user groups (such as Snapchat and LinkedIn). However, it's debateable how strong same-side network effects are in search, given it does not generally matter to users how many others use the same search engine.

Acquisition strategies

The ACCC also found that Facebook's and Google's strategic acquisitions have contributed to their market power and made several recommendations to seek to ensure its ability to scrutinise digital mergers.2

Advertising power

In the event of any eventual challenge to Google and Facebook's competitive conduct, the nature of competition and power on the advertising side of their platforms will likely be highly contentious. Irrespective of their market share and exposure to dynamic competition on the consumer-facing side of their platforms, there will be important issues to be determined about whether their competitive conduct is effectively constrained by advertising rivals.

Perhaps pre-positioning for that contention, the ACCC adopted some consistently narrow views about the nature of advertising competition. For instance, it found that:

  • none of TV, radio, outdoor and print advertising are a close substitute for online advertising;
  • within online, display advertising is not a close substitute for search advertising;
  • within search advertising, neither classified advertising nor 'vertical' search (e.g. Amazon or Expedia) are close substitutes for general search services provided by Google; and
  • within display advertising, Facebook faces little competitive constraint (in respect of its Facebook and Instagram ad inventory) either from other suppliers of non-social display advertising or from Snapchat, even in social.

'Potential' for market power misuses

Beyond analysing the existence of platform market power (which the ACCC acknowledges is not, itself, a concern), the ACCC's approach to analysing market conduct and competition concerns is substantially less developed. Given the focus and detail of the DPI, this apparent gap in the final report is anti-climactic.

Leveraging and preferencing

The ACCC identifies potential concerns about the platforms:

  • creating technical specifications to benefit their own products;
  • preferencing their own ad inventory;
  • ranking their own advertising services higher on search results or social media feeds, or excluding rivals;
  • favouring advertisers that use their advertising services in organic results or news feeds;
  • favouring websites that are a part of their advertising networks; or
  • preferencing their adtech services.

However, aside from a first-principles analysis, which ultimately amounts to an acknowledgement that vertically-integrated firms with substantial market power may have the ability and incentive to behave anti-competitively, no substantive analysis of potential anti-competitive conduct by the platforms is revealed in the Final Report.

Instead, the ACCC identifies 'incentives' to engage in anti-competitive conduct and the 'significant potential' for, and 'past evidence' of, infringements (and refers, in particular, to overseas enforcement matters).3

'In-market' misuses of market power

Additionally, the ACCC flagged the following concerns, which may also result in foreclosure or customer detriment:

  • foreclosing competitors' access to data;
  • preventing rivals from placing search ads on websites on the platforms' advertising networks;
  • restrictions on user behaviour (e.g. linking to rival social media sites); or
  • exclusionary behaviour (e.g. terminating competitor customers).

The ACCC identified two Australian matters. First, Dialogue commenced proceedings against Facebook in April 2019, alleging that Facebook breached Australia's misuse of market power laws by restricting Dialogue's access to Facebook and Instagram. Second, Unlockd commenced (but subsequently discontinued) proceedings against Google, alleging that Google terminated its access to Google's Play Store and advertising services because Google viewed it as a competitor.

ACCC responses

The ACCC notes that the terms of reference do not require it to focus on whether digital platforms have misused any market power. However, given it has identified a number of consumer law matters it is currently investigating, if the ACCC had uncovered specific competition concerns it seems reasonable to assume that it would have indicated that in the report.

Unlike in other areas of the Final Report, the ACCC does not suggest that the law needs to change to pursue potential competition concerns. The ACCC also considers that the existing tools of the competition law framework remain applicable for digital markets. In part, that is because the Australian prohibition on the misuse of market power was substantially broadened in November 2017.

Instead, the ACCC is focused on sharpening its investigative tools, addressing its own information gaps and generally seeking to build investigative capability in relation to digital markets. The ACCC identified that 'opacity and complexity' in digital, and particularly in online advertising, markets means that self-preferencing and leveraging might go undetected by regulators or market participants.

There are four parts to the ACCC's plans to bulk-up its digital enforcement capability.

  1. The creation of a specialist digital platforms branch to investigate competition issues relating to digital platforms.
  2. The ability to proactively investigate and gather information.
  3. The ability to periodically compel the production of data from digital platforms (the ACCC already has this power in telecommunications and energy markets).
  4. Publicly reporting on 'issues of concern' and making recommendations to Government and other agencies.

The ACCC's efforts will be focused on the larger digital platforms, which will need to brace themselves for years of sustained Australian regulatory complexity and cost, but there is clear potential for spill-over burdens to be imposed upon other market participants.

The ACCC has also made clear that the new digital platforms branch will work closely with overseas agencies, sharing information and aligning approaches to enforcement. This is likely to reinforce the feedback loop, and duplication, in global enforcement activity with which major global platforms are currently grappling.

Flirting with more radical solutions

The ACCC received ample encouragement to lead the world in pursing more radical reforms. While it is clear that little was 'off the table', the ACCC has generally reverted to a conventional regulate-and-supervise model.

Tackling perceived default biases

The ACCC identified branding and default bias in search markets as a barrier to entry that supports incumbents' market power. In response to similar concerns from European regulators, Google recently allowed users of Android devices to choose their default search engine and default internet browser from a number of options.4 The ACCC will recommend to the Government that it should consider compelling Google to offer this choice if Google does not introduce similar options for Australian users within six months.

Break-up and access to data

The ACCC considered and rejected two radical options.

First, the ACCC considered the potential for obligations imposed on platforms to share data or provide interoperability to lower barriers to entry and drive innovation in digital markets. While understatedly noting 'practical limitations' to such reforms, it declined to make any recommendations. It did, however, identify a specific intention to evaluate data portability further as it considers sectors to which the new Consumer Data Right regime will apply in future.

Second, echoing calls made overseas, some submissions advocated the break-up of the largest platforms. The ACCC did not engage with the enormous legal obstacles to implementing such a remedy and instead offered a principled response – to the effect that market forces are better determinants of market structures, divestitures would be unlikely to address network effects or branding/bias issues, and designing structural solutions would be very challenging given the data flows between businesses or parts of businesses.

While the lack of specific adverse findings on competition law issues is something of a surprise, the major digital platforms are a long way from being out of the woods in Australia. In addition to the various consumer law, data privacy and media reforms and regulation recommended elsewhere in the final report, they are facing at least 5-10 years of sustained regulatory scrutiny across their Australian operations.

Footnotes

1 Network effects describe the effect whereby the more users there are on a platform, the more valuable that platform tends to be for their users. Cross-side network effects are present when the number of users in one type of user group increases (or decreases) the value of the platform for users in another type of user group on the platform. Same-side network effects are present when the number of users in one type of user group increases (or decreases) the value of the platform for users in that same type of user group.

2 Those changes will be considered in detail in a forthcoming article on the implications of the DPI for M&A in the sector.

3 For example, the European Commission's 2017 finding that Google had abused its dominance in search services by giving an illegal advantage to Google Shopping (currently on appeal).

4 See https://www.blog.google/around-the-globe/google-europe/supporting-choice-and-competition-europe/ and https://www.blog.google/around-the-globe/google-europe/presenting-search-app-and-browser-options-android-users-europe/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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