Last Wednesday the CMA published its voluminous Final Report on its market study on online platforms and digital advertising, accompanied by 27 (!) detailed Appendices. This is a massive piece of work, and the CMA should be commended for completing it within just one year.
The Report examines ad-funded online platforms with a focus on three main areas: (a) competition in consumer services (primarily search and social media); (b) consumer control over data; and (c) competition in digital advertising.
I will not try to cover the whole Report (indeed, this would require several blog posts). For the purposes of this post, I will focus on the third theme, namely competition in digital advertising and in particular “open display”. This is an area where Damien and I have done quite a bit of research (and published several papers) and we were looking forward to see whether the CMA confirms our research. We were glad to find that it does in most respects.
Google’s position in the ad tech stack
The CMA found that online ad intermediation comprises a series of vertically related markets (e.g., ad serving for publishers, ad exchanges/SSPs, DSPs, ad serving for advertisers), in all of which Google has the strongest position. The markets for ad serving were found to be highly concentrated both on the publisher-side (with Google accounting for more than 90% of display ads in the UK) and the advertisers-side (with Google accounting for 80%-90% of ads served in the UK). Google was found to hold very strong positions also in the markets for ad exchanges/SSPs (50%-60%) and DSPs (50%-60%).
Vertical integration and conflicts of interests
The CMA noted that, while vertical integration can give rise to some efficiency benefits (e.g., when it comes to cookie matching), it may also be a source of conflicts of interests. The extent to which such conflicts harm customers depends, among others, on the market power of the intermediary facing the conflict and the degree of information asymmetry between it and its customers. Of all the forms of vertical integration, the integration of a DSP and of a publisher ad server within a single provider (as is the case of Google) was held to be the most problematic.
With regard to Google in particular, the CMA examined several ways in which the company has engaged in leveraging practices to build its position in open display. In particular, the CMA found that:
- Google can leverage the importance of YouTube as a source of inventory to increase its market power in the DSP market (since 2016 only Google’s DSPs may buy YouTube programmatically). The CMA dismissed Google’s privacy arguments put forward to justify cutting third-party access to YouTube.
- Google can leverage its search advertiser customer base through Google Ads (e.g., through the use of default settings) to strengthen its position in open display.
- Google has made it harder for non-Google publisher ad servers to access Google demand (inter alia by not participating in header bidding), reducing competition in ad serving. Note that the CMA dismissed various arguments Google put forward to justify its decision not to participate in header bidding – in line with what Damien and I noted in a recent paper rebutting an analysis from Google’s advisers.
- Google historically had a “last look” advantage over header bidders (again, confirming our analysis). While this “last look” no longer exists as part of Google’s switch to a single unified first-price auction in 2019, Google has rolled out a series of changes that may still enable it to tilt the balance to its favor, to the effect that publishers have to trust Google (citing our Trust me I’m fair paper). The CMA noted that Open Bidding was designed in a way to disadvantage third-party SSPs and Unified Pricing Rules were rolled out to increase Google demand’s win rate.
Ad tech fees
The CMA carried out its own analysis of ad tech fees and found that on average, publishers receive 65% of the ad spend (i.e. the ad tech take rate is 35%). That figure differs from other studies (e.g., the ISBA study found that publishers receive approximately 51% of ad spend) but the CMA noted that in practice publishers’ share may be lower than 65%. In any event, the CMA observed that the fact that intermediaries capture 1/3 of ad spend raises legitimate concerns as to whether the market functions efficiently.
With regard to Google in particular, the CMA held that its average take rate is 30%. Even so, it noted that Google’s position is still a source of concern:
- First, Google could decide to increase its fees in the future. Google has the ability and incentive to use its market power.
- Second, decreased competition in ad tech could have dynamic effects on innovation.
- Third, through its strong position in open display Google may be trying to shield its position in search advertising (a form of defensive leveraging).
Privacy, data protection & competition
One of the most interesting parts in the Final Report is the one discussing the cross-cutting issue of data protection and competition. The CMA should be commended for engaging deeply with this issue – likely to grow in importance as we move deeper in the digital era – and co-operating closely with the ICO.
The CMA noted that large platforms (Google and Facebook) have obtained a quasi-regulatory role in relation to data protection, setting the rules not only for them but also for other market participants. Two concerns were then examined.
First, the GDPR seems to have strengthened the position of Google and Facebook (the CMA cited Damien on this point). These platforms seem to apply a higher standard when it comes to data sharing with third parties, while at the same time adopting a more permissive view of data protection rules when it comes to data sharing within their “walled gardens”.
Second, Google’s decision to deprecate third-party cookies on Chrome could alter fundamentally the shape of online advertising. This is another issue on which Damien and I have written, and we are glad that the CMA examines it in detail. Given the fact that third-party cookies are a fundamental building block of online advertising, their demise on Chrome could result in great benefit for the walled gardens (Google, Facebook et al.) which rely on first-party / authenticated data. In addition, if the Privacy Sandbox proposals come to fruition, then Chrome will become the “key bottleneck” in ad tech.
At a more conceptual level, the CMA stressed the need for careful balancing between privacy and other aspects of consumer welfare, such as competition. While a measure may enhance privacy in the near term, it may at the same time result in a concentration of personal data amongst fewer providers, ultimately impacting consumer choices and control in the long term.
Of particular interest is also the fact that the CMA dismissed various privacy-related arguments that Google has put forward to justify problematic practices (e.g., restricting third-party access to YouTube; not participating in header bidding).
The CMA eventually declined to make a Market Investigation Reference. Instead, it opted for the path of governmental legislation. The CMA thus suggests that the UK government pass legislation to establish a “pro-competitive ex ante regulatory regime” which would complement ex post competition enforcement, in line with the proposals in the Furman Review.
This regime would comprise two elements:
First, a code of conduct applying to (ad-funded) firms with strategic market status (Google and Facebook would be likely designated as holding such status) to be enforced by the Digital Markets Unit (which could be either a new regulator or a branch within an existing regulator). The code would be built on the high-level principles of fair trading (aimed at addressing concerns over exploitation), open choices (aimed at addressing concerns over exclusion) and trust and transparency (dealing, among others, with the issue of opaque algorithms deployed by large platforms), which would be further fleshed out in accompanying guidance. The code would thus aim at protecting competition, and would have the great benefit of speed.
Second, a set of pro-competitive interventions. These would aim at tackling the source of the problem, i.e. the market power of platforms. Since they would be transformative in nature, the Digital Markets Unit would have to be very careful in implementing them. The CMA envisages that these interventions would take three forms: (a) data-related interventions (e.g., mandating interoperability, access to data or data unbundling); (b) default settings; and (c) separation interventions. The CMA noted that there may be a case for ordering separation remedies in the case of Google’s position in open display.
With that said, let’s see how the UK government will respond. It has already in place a Digital Markets Taskforce advising it on potential legislation to unlock competition in digital markets. At the same time, the EU has launched a public consultation for the upcoming Digital Services Act and the proposed New Competition Tool. If something is certain, this is that regulation is on the horizon.