The UK’s Competition and Markets Authority (CMA) is calling on the government to introduce a new pro-competition regulatory regime to tackle Google and Facebook’s market power.
The dynamic nature of digital advertising markets and the types of concerns identified by the Competition and Markets Authority (CMA) in its market study are such that existing laws are not suitable for effective regulation. It is therefore recommending a new pro-competition regulatory regime to govern the behaviour of major platforms funded by digital advertising, such as Google and Facebook.
This recommendation to government is the result of a year-long examination of the markets. The CMA used its statutory information gathering powers to lift the lid on how advertising revenue drives the business model of major platforms.
The CMA’s concerns
UK expenditure on digital advertising was around £14 billion in 2019, equivalent to about £500 per household. About 80 per cent of this is earned by just two companies: Google and Facebook. Google enjoys a more than 90 per cent share of the £7.3 billion search advertising market in the UK, while Facebook has a share of over 50 per cent of the £5.5 billion display advertising market. Google’s revenue per search has more than doubled since 2011, while Facebook’s average revenue per user has increased from less than £5 in 2011 to over £50 in 2019.
The services provided by Facebook and Google are highly valued by consumers and help many small businesses to reach new customers. While both originally grew by offering better services than the main platforms in the market at the time, the CMA is concerned that they have developed such unassailable market positions that rivals can no longer compete on equal terms:
Each of these factors individually presents a potential barrier to new competition, but together they work to reinforce each other and are extremely difficult to overcome.
These issues matter to consumers. Weak competition in search and social media leads to reduced innovation and choice, as well as to consumers giving up more data than they would like. Furthermore, if the £14 billion spend in the UK last year on digital advertising is higher than it would be in a more competitive market, this will be felt in the prices for hotels, flights, consumer electronics, books, insurance and many other products that make heavy use of digital advertising. The CMA found that Google’s prices are around 30 per cent to 40 per cent higher than Bing when comparing like-for-like search terms on desktop and mobile.
Google and Facebook’s market positions also have a profound impact on newspapers and other publishers. The CMA has found that newspapers are reliant on Google and Facebook for almost 40 per cent of all visits to their sites. This dependency potentially squeezes their share of digital advertising revenues, undermining their ability to produce valuable content.
The need for a new regime
The scale and nature of these issues mean that a new pro-competition regulatory regime is needed so that users can continue to benefit from innovative new services; rival businesses can compete on a level playing field and publishers do not find their revenues unduly squeezed. The CMA’s proposals are consistent with those made by Professor Jason Furman in his report for the government.
The CMA has proposed that within the new regime a ‘Digital Markets Unit’ should have the ability to:
Whilst this recommendation is UK-focused, many of the problems that the CMA has identified are international in nature. It will therefore continue to take a leading role globally in relation to these issues as part of the CMA’s wider digital strategy.
“Through our examination of this market, we have discovered how major online platforms like Google and Facebook operate and how they use digital advertising to fuel their business models,” advised CMA Chief Executive Andrea Coscelli. “What we have found is concerning – if the market power of these firms goes unchecked, people and businesses will lose out. People will carry on handing over more of their personal data than necessary, a lack of competition could mean higher prices for goods and services bought online and we could all miss out on the benefits of the next innovative digital platform.”
“Our clear recommendation to government is that a new pro-competitive regulatory regime be established to address the concerns we have identified and regulate a sector which is central to all our lives,” he stated.
Safeguarding people’s control over their data is paramount to privacy as well as to the healthy operation of the market, so the CMA has worked with the Information Commissioner’s Office (ICO) to examine the impact of privacy regulation on the market.
The General Data Protection Regulation is still in its early stages and the CMA is concerned that big platforms could be interpreting it in a way which favours their business models, instead of in a way which gives users control of their data. For example, big platforms might share user data freely across their own sizeable business ecosystem, while at the same time refusing to share data with reputable third parties – which could have a detrimental impact on smaller players. The CMA’s market study advocates a competitive-neutral approach to implementing privacy regulation, so that the big platforms are not able to exploit privacy regulation to their advantage. It will be working with the ICO and Ofcom further to address these issues through the Digital Regulation Cooperation Forum, the details of which have also been published.
Digital Markets Taskforce
The CMA, working with the ICO and Ofcom, is formally launching a Digital Markets Taskforce. The Taskforce, originally commissioned by the government, will build on the conclusions of the market study, as well as looking more widely across all platforms to consider the functions, processes and powers which may be needed to promote competition. It will advise government on how a new regulatory regime for digital markets should be designed. To inform its work, the CMA is publishing a call for information, and writing to a number of platforms, seeking views and information. The Taskforce will deliver advice to government by the end of 2020.