Examining the impact of digital platforms on competition in media and advertising markets

Speakers: 
Mr Rod Sims, Chair
Conference: 
ThinkTV & ANAA Top 50 CMO Event
27 February 2019

Chair Rod Sims delivers a keynote address regarding the ACCC’s world-first Digital Platforms Inquiry at an event hosted by AANA and ThinkTV. Mr Sims, provides insights on the future of marketing and advertising, focusing particularly on the role of Google and Facebook.

Transcript: 

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Good evening and thank you for the invitation to speak here tonight to a room full of marketing and advertising experts, which makes for a wonderful change from lawyers and economists.

The ACCC’s purpose is “making markets work”. I think you’ll agree it’s a snappy tagline. But more than that, it’s a reflection of our belief that competition and well informed consumers matter because they deliver good outcomes for consumers and for the Australian economy.

I will use our time tonight to explain some of the issues we are exploring in our Digital Platforms Inquiry. As you know last year the Federal government asked the ACCC to investigate and make recommendations regarding the impact of digital platforms like Google and Facebook on the media and advertising markets, focussing in particular on news and journalism.

My focus will be on the issues and ideas stemming from the Inquiry’s preliminary report, published in December, specifically those most relevant to marketing and advertising executives.

Firstly, I will touch on the market power that we see the key digital platforms Facebook and Google have and the impact this has on competition.

Secondly, I’ll share our preliminary findings on the opacity of the digital platforms’ algorithms and policies. Issues we believe warrant further analysis include the effects of Google and Facebook’s algorithms and policies, the ad-tech supply chain (with some 30-75%, estimated to be going to ad-tech intermediaries) and ad-verification concerns.

The other area we know we need a deep dive on is the inconsistency of the regulatory framework in relation to traditional media.

We cannot address the issues we have identified without your views, as advertisers, on the preliminary recommendations and concerns we have identified.

Finally, we’re also interested in future trends in the market. Chapter seven of our preliminary report looks at emerging market and technology driven trends, including the impact of addressable television advertising and how growth in this market may influence advertising markets more broadly.

I’ll conclude with an overview of our next steps and how we will take this Inquiry forward ahead of our final report in June.

Digital platforms’ market power

The digital platforms, of course, have brought huge benefits to both our lives as individuals and our society more broadly. They are rightly regarded as impressive and successful, and very focused, commercial businesses. Google and Facebook are rapidly transforming the way consumers communicate, access news, and view advertising.

Their rise has created new opportunities for advertisers to specifically target relevant audiences and provided advertisers with additional channels to reach consumers.

However, our preliminary report also found, after extensive analysis, that Facebook and Google each have substantial market power in certain markets.

But before we were able to determine market power, we first needed to define what constitutes the market.

Part of our role was therefore to identify the markets relevant to this Inquiry: firstly, the relevant consumer-facing markets; secondly, the advertising markets; and thirdly, what we call a ‘media referral’ market.

These markets are all linked as different sides of the same platform (a so-called multi-sided market). As advertisers you will appreciate that your willingness to purchase advertising on a platform depends on the number of consumers using that platform.

We found that search advertising forms its own market and other forms of advertising are not substitutable. This is because search advertising is particularly suitable for direct response campaigns that focus on conversion, rather than display advertising which we understand is typically used for promoting general brand awareness rather than a direct response or sale.

Google has substantial market power in search advertising; and we also think Facebook has substantial market power in display advertising, a market which captures both advertising on social media platforms as well as other websites.

Each month, approximately 19 million Australians use Google search; 17 million access Facebook; 17 million watch content on YouTube; and 11 million double tap on Instagram.

With this size audience, digital platforms are a primary channel for businesses looking to reach Australian eyeballs and, more importantly, their wallets.

As advertisers, it is highly likely that Google is going to be part of your mix if your objective is online conversions (i.e. making a sale). Similarly, if you want your brand to reach consumers, Facebook is typically going to be part of your marketing mix.

They are unavoidable business partners.

The reality is quite simple: in digital advertising in Australia Google and Facebook dwarf others. It is estimated that sixty-eight cents in any digital advertising dollar is going to them.

However being big is not a sin. Australian competition law does not prohibit a business from possessing substantial market power or using its efficiencies or skills to outperform its rivals.

But the dominance held by each of Google and Facebook in certain markets does mean their conduct should be subject to particular scrutiny to identify whether it is creating competitive or consumer harm. This is particularly the case when the dominant businesses are vertically integrated, that is, present at multiple levels of the same supply chain. There are also allegations of misuse of this market power, both here and, certainly, overseas.

Opacity of operations and the ad-tech supply chain

This is a neat segue to the second set of issues I want to address tonight, which is the opacity of algorithms and policies, including the operation of the ad-tech supply chain, where opacity is particularly prevalent.

Here there are four issues I want to highlight.

First, Google and Facebook operate platforms that facilitate other companies, including media companies, offering advertising opportunities, but at the same time compete with these companies for advertising dollars. A supplier which is also a critical gateway has the ability and incentive to provide themselves with an advantage or, conversely, to discriminate against others.

There are different examples of this vertical integration and opportunity to discriminate in the delivery of online advertising, and in particular, across the programmatic advertising supply chain. While Facebook is not present across the adtech supply chain in the same way as Google, it is nevertheless vertically integrated through its operation of the Facebook audience network and the services offered on the Facebook platforms.

For media companies who compete against Google and Facebook this is a critical issue. As advertising revenue increasingly shifts to digital, their survival hinges on an ability to monetise content through digital advertising, and any form of discrimination that results in an unfair playing field reduces their ability to do so. So it is critical we get to the bottom of the issue of whether Google or Facebook are giving themselves any ‘free kicks’.

However, let me be clear here: there is no evidence that could be put before a court that this discrimination or favouritism is necessarily occurring in Australia. Equally, we don’t know that it isn’t. Google and Facebook want us to take them on trust.

I will discuss shortly our proposal to address this issue, which aims to provide businesses using key digital platforms with comfort as to the operation of their policies.

Second, the pricing of intermediary services, that is, the cut of the amount paid by the advertiser for the ad impression, is seen by many to be opaque, particularly when there are many intermediaries involved.

Collectively, the amount charged or ‘cut’ taken by intermediaries is estimated to be between 30 and 75% of the final price paid, that is it is possible that less than 50c in the $1 paid for actually goes to delivered advertising. There is no transparency around these transactions.

It is important for the ACCC to better understand the issues with the ad tech supply chain because a lack of transparency means that advertisers do not know what they are paying for, where their advertisements are being displayed, and to whom.

Higher prices for advertisers translate to higher prices for consumers.

Third, the other side of the transparency equation is whether advertisers can verify whether the ads that they are purchasing are actually shown to their target audience. Here a number of concerns have been raised with us. For example, the AANA and Free TV have raised that Facebook and Google monitor the delivery of advertisements on their own platforms arguably acting as the scorekeeper in a game where they are a player, while, for example, TV broadcasters are subject to third party verification of their audiences.

The reported concern is that if advertisers are unable to verify the delivery and performance of their ads this may mislead advertisers into thinking that their ads perform better than they do.

Another concern is ad fraud, which involves the practice of creating fraudulent advertising clicks, impressions and conversions to generate digital advertising revenue. The result is that advertisers are charged for advertising that does not actually reach their intended audience at all.

Some estimates are that globally it costs advertisers US $7.2 billion. While fraudulent websites are unlikely to be Australian websites, the advertisers impacted by ad fraud would certainly include Australian advertisers.

Both Google and Facebook have rejected claims that advertisements on their platforms are not verifiable. In addition to internal processes, they both say they allow third party measurement partners to verify metrics on behalf of advertisers.

The terms on which independent third party measurement partners currently get access to this data from the digital platforms are, however, not clear, and the ACCC has not yet reached a view as to whether the existing arrangements are sufficient to address the issue. This is an issue we hope to achieve clarity on before our final report in June.

Fourth, the lack of clarity around ad-tech also arguably disadvantages online media businesses’ ability to monetise their content via advertising opportunities. The argument that has been put to us is that the opacity around the delivery of programmatic advertising may make it difficult for advertisers to effectively value and compare the price of advertisements placed next to premium media content and advertising opportunities on other websites.

Put simply, publishers are arguing that because of the lack of transparency, advertisers don’t often know where their advertising appears online, and if they did they would be more likely to spend money with them.

We have not yet reached a view on these issues and we are continuing to examine the ad-tech supply chain with a view to understand better how it works and how this impacts advertisers.

In this we would like your help.

One of the key preliminary recommendations, that has received media attention, aims to address some of the concerns with opacity. Our recommendation is that a regulator, whether an existing one or a new one, be tasked with monitoring, investigating and reporting on whether digital platforms which meet the relevant threshold, are engaging in discriminatory conduct by favouring their own business interests above those of advertisers or potentially competing businesses.

Like all markets, there can be significant consequences when a business holds substantial market power but these risks are greater when the firms are also present across other parts of the supply chain. It is therefore critical to understand the policies and operations of firms in order to protect the consumer welfare and minimise harm.

Given the potential for harm to occur, our recommendation aims to give a regulator the power to shine a light on what is occurring and powers to investigate.

We also left open the possibility of a regulator having greater involvement in the monitoring of ad tech prices in order to overcome the lack of transparency in the market. Given the nature of the preliminary report, the recommendations describe principles rather that specific mechanisms. Our final report will be more specific once we have had the benefit of feedback from industry, consumers and stakeholders.

Inconsistency of the regulatory framework

Continuing with the list of specific issues, our preliminary report identified that the regulatory framework underpinning digital platforms is inconsistent and out of step. The policies and legislation have not kept pace with the stunning rise to influence of digital platforms and, in particular, Facebook and Google.

Digital platforms like Google and Facebook are more than mere distributors or pure intermediaries in the supply of journalism in Australia. They increasingly perform similar functions as news media businesses such as selecting, publishing and ranking content, including significant amounts of news media content.

However, digital platforms are not subject to many of the same regulations as other media companies, despite their increasing roles in the dissemination of content, including news and journalism. For example, digital platforms, unlike media companies which broadcast on TV and radio:

  • are not subject to licencing conditions which impose additional advertising obligations including prohibitions and/or specific conditions on tobacco advertising, prohibitions on therapeutic goods and restrictions on political advertising
  • are not required to ensure a minimum amount of Australian or regional local content is distributed on their platforms, and
  • are not under any obligations to classify content or to restrict access to prohibited content under specified licence arrangements.

Our concern here is that this regulatory imbalance may provide an unfair advantage to digital platforms in attracting advertising expenditure by allowing them to operate within a very different journalistic context to traditional media outlets.

In the digital news context, consumers also face a potential risk of being surrounded by filter bubbles, or echo chambers, and ultimately reading less reliable news. Again, while the evidence of this occurring in Australia is not yet compelling, the importance of this issue means it requires closer scrutiny.

News and journalism perform a critical role in society and we must ensure that our regulatory framework keeps pace with market disruptions.

Future trends

As I foreshadowed earlier, I am interested in hearing your views on some of the developments and potential trends for advertisers; particularly the impact of addressable television advertising: that is, targeted television advertising to particular consumers based on the collection of individual viewer data.

We’re interested in how the growth of addressable television may influence advertising markets; whether this is something advertisers think will impact their advertising campaigns in the short to medium term; and how broad and how valuable the consumer data obtained may be to both advertisers and commercial networks.

Further, we welcome your insights into whether this will complement or compete with Google and Facebook advertising in terms of the platforms’ ability to target audiences on a granular level, particularly at the consideration and purchase stages of the advertisement buying cycle.

Of course, addressable television clearly raises issues relating the collection of consumers’ user data and how it is used.

The concerns which we raise in our preliminary report with digital platforms’ online terms of use and privacy policies may well apply to the terms offered by television networks should they also attempt to collect large amounts of data from their viewers, in a similar way.

Next steps

We have received a large number of submissions in response to our Preliminary Report which we are continuing to digest and consider. These submissions will shortly be published on our public register.

The ACCC is also continuing to collect information across the media and advertising markets and engage with stakeholders both in Australia and internationally.

Our final report is due in June this year. We will make a range of recommendations to Government about these important issues that we know matter to the audience here very much professionally as marketers, but also as consumers in an ever-changing society.

We seek your input. Let me be very clear; we will make recommendations with or without your input. Our recommendations, however, will be some much better with your input than without it.

Conclusion

In conclusion, over a short period of time we have seen the stunning rise to influence of Facebook and Google. We can certainly applaud their commercial success, and the benefit they have brought to consumers and also advertisers. Their impact on media and advertising markets is, however, multifaceted.

Governments and regulators must, we believe, stay ahead of this fast-changing game.

As an independent regulator, we want innovation. But it requires strong competition. It is important, at this pivotal moment, that we stay true to our purpose of making markets work and ensure markets in this critical sector are working as they should: for the benefit of media businesses, consumers, and advertisers alike.

Thank you.