Back to the future: ACCC releases its preliminary Digital Platforms Inquiry report

The Australian Competition and Consumer Commission (ACCC) has released a Preliminary Report in its Digital Platforms Inquiry. If its preliminary recommendations are adopted, there will be significant ramifications (and an increased regulatory burden) not only for major digital platforms, but also potentially for smaller, specialised platforms, media businesses, advertisers and advertising intermediaries.

Background

The Inquiry is examining the impact of 'digital platforms' – i.e. search engines, social media and digital content aggregation platforms – on competition in media and advertising services markets.[1] Specifically, it is looking at the effect of digital platforms on media content creators, advertisers and consumers, with a particular focus on consequences for the supply of news and journalistic content.

The Inquiry was announced at the end of 2017 in the context of reforms to media ownership laws. The Preliminary Report reiterates certain regulatory themes that have arisen in other contexts, such as:

• the asymmetry of regulation across media, which was identified in the Convergence Review conducted by an expert panel under the previous Labor government in 2012[2]; and
• reforms to the Competition and Consumer Act 2010 (CCA), which the ACCC has championed in recent years (such as a strengthened unfair contracts terms regime for the Australian Consumer Law).

However, it also contains significant new findings and a suite of ambitious (and, in some respects, unexpected) recommendations for new regulatory structures and mechanisms, aimed at addressing ACCC concerns about the market power of Google and Facebook.

The Preliminary Report underlines a key focus of recent ACCC communications and decisions, which have often emphasised the significance of data as an asset and source of competitive advantage, and the implications of access (or lack of access) to data for competition and consumer welfare.

It’s clear that many of the Preliminary Report’s findings will have implications beyond the scope of the Inquiry. They give a broader insight into the ACCC’s likely ‘house view’ and approach on technology and data issues, including in the context of future merger reviews and investigations of anticompetitive conduct in various markets.

The broad scope of the Inquiry terms of reference also ensured that it would have implications beyond competition and consumer laws, and the Preliminary Report contains recommendations with far reaching implications for privacy, data protection and traditional media in terms of journalistic standards and content regulation.

Although the competition law impacts of major digital platforms are well-trodden ground for regulators around the world, the ACCC trumpeted the Inquiry as a world first that would have important implications for platform regulation. The Inquiry seems to have lived up to that prediction with a fairly aggressive Preliminary Report that, in some respects, goes to issues at the heart of digital platform business models.

Submissions in response to the Preliminary Report are due by 15 February 2019.

Key findings

1. Market power

The Preliminary Report’s central findings are that:

• Google has substantial market power in the markets for general search services, search advertising and news referral services; and
• Facebook has substantial market power in the markets for social media services, display advertising and news referral services.

In the ACCC’s view, there are significant barriers to entry and expansion for search and social media platforms that serve to entrench the market power of Google and Facebook. The barriers include:

• network effects (where the value of offering a service increases with the number of users);
• the ability to improve and target services as a result of access to large volumes of user data; and
• switching costs for consumers and advertisers.

While it is probably uncontroversial that Google and Facebook have strong positions in certain markets, the relevant markets identified by the ACCC seem, in some respects, narrowly defined.

2. Advertising

The Preliminary Report acknowledges that Google's and Facebook’s respective services provide many significant benefits to advertisers through their ability to target relevant audiences. However, the ACCC has expressed concerns about a general lack of transparency, including challenges for advertisers such as:

• how to verify whether ads are delivered to their intended audience; and
• uncertainty about whether digital platforms are favouring their own vertically integrated businesses over those of their advertisers or potential competitors.

The complexity of the supply chain for some forms of advertising, and the bundling of certain advertising services, have also been identified as adversely affecting competition in some of these markets.

3. Media businesses, quality and choice

Digital platforms are found in the Preliminary Report to be active and important participants in the online news ecosystem.

The ACCC characterises Google and Facebook as ‘must have’ sources of traffic for news media, and finds that they are in a position to exert significant influence on news consumption in Australia. Specifically, the ways in which the algorithms and policies of digital platforms (which are generally not transparent) rank and display news stories can affect the amount of traffic on news websites, the incentives to produce original content, the ability of news organisations to build brand recognition.

A further concern raised in the Preliminary Report is that, while digital platforms are increasingly performing similar functions to traditional media businesses, they typically face much less regulation. This extends to journalistic standards, certain aspects of content regulation (including local content quotas), some advertising standards and licence conditions (which apply to radio and television broadcasters). In the ACCC’s view, this can give digital platforms an unfair advantage.

As to content choice and quality, the ACCC concludes that digital platforms have significantly altered incentives to produce news content. They make it less attractive to produce content that may have a smaller audience, even where there is a significant contribution to the broader public interest. In addition, issues of authenticity and quality are exacerbated in the online environment.

4. Consumers and privacy

The Preliminary Report states that all consumers will be better off if they have enough control over their user data to make informed choices that align with their privacy and data collection preferences.

The ACCC has identified a number of factors that prevent informed choice in this context, including take-it-or-leave-it 'click-wrap' terms, information asymmetries and difficulties associated with assessing the current and future costs of consumers providing their data.

The Preliminary Report references consumer survey data supporting these findings. However, consumer survey data is arguably of limited value here. It is unsurprising that consumers report that choice and control of their data are important, where they do not (yet) have to contend with trade-offs that could result from platforms receiving less consumer data. These might include lower-quality search results, or digital services that are no longer free.

In addition, the ACCC’s sweeping findings about the inadequacy of disclosures around data collection, use and disclosure arguably do not reflect the relative complexity of the services being provided.

Preliminary recommendations

1. New regulatory frame work for monitoring of digital platforms’ activities (Preliminary Recommendations 4 and 5)

As mentioned, the ACCC expresses a concern that there is a lack of transparency in how digital platform algorithms operate, particularly given that digital services are often an essential way for businesses to reach their customers.

To address this, the ACCC proposes an entirely new regulatory framework. A regulatory authority (which may or may not be the ACCC itself) with information gathering and investigative powers (Regulator), would monitor whether digital platforms are engaging in discriminatory conduct by favouring their own vertically integrated businesses over those of advertisers or potential competitors.

The framework would apply to digital platforms with revenue from digital advertising in Australia of more than AU$100 million, and these companies would be subject to regular reporting requirements.

In addition, the Regulator may be tasked with monitoring how advertising and journalistic content is ranked and displayed on digital platforms. This would moderate the potential for producers of news and journalistic content to be adversely affected by changes to algorithms and policies.

The monitoring is proposed to apply to digital platforms generating revenue (of any kind) in excess of AU$100 million per annum in Australia, and which also distribute news and journalistic content.

The significance of these proposals, and the extent of the additional regulatory burden they likely represent, should not be underestimated. Given this, it is a concern that relatively little detail has been provided.

At this stage there is significant uncertainty about the underlying principles that would govern the new regulatory framework. The ACCC appears to be advocating a regime that would go well beyond simply monitoring whether the digital platforms algorithms and policies contravene existing competition and consumer law prohibitions.

There is also uncertainty about which digital platforms would be subject to oversight. The primary focus of the ACCC appears to be on Facebook and Google, but a AU$100 million revenue threshold could capture a number of much smaller specialised platforms. In addition to the Regulator, the ACCC has recommended the creation of a separate digital platforms ombudsman to deal with complaints from advertisers, consumers and media companies.

There are early signs that even traditional media businesses may not view these proposals favourably.[3]

2. Harmonisation of media regulation across delivery platforms (Preliminary Recommendation 6)

The Preliminary Report identifies that, in contrast to traditional media, online content (including news and journalistic content) is lightly regulated. The ACCC considers that this gives rise to certain competitive advantages, in terms of both operations and cost.

The ACCC is proposing that media regulation be harmonised and platform agnostic. It has recommended that a separate independent review design a suitable regulatory framework to achieve this.

It is true that there is significant divergence in the level of regulation faced by media businesses, depending on the mode of delivery. Equally, there is scope for simplification. That said, the rationale for some differences flows directly from the different nature of services being provided (eg linear vs timeshifted content) or reliance on access to a scarce and valuable public resource such as broadcasting spectrum.

By recommending a separate inquiry on these issues the ACCC has, for the time being, side-stepped the significant complexities that would be involved in any effort to harmonise regulation across traditional and digital media. (This includes the critical question of whether harmonisation should mean digital platforms are subject to more regulation or traditional media should be subject to less).

Interestingly the ACCC has not made any specific comment on the regulatory framework proposed by the Convergence Review, which was intended to achieve similar outcomes.

3. New, express criteria for mergers (Preliminary Recommendations 1 and 2)

The ACCC has proposed amending the CCA’s prohibition on anticompetitive acquisitions to clarify that the following factors are relevant:

• the likelihood that an acquisition would result in the removal of a potential competitor; and
• the amount and nature of data which the acquirer would likely have access to as a result of the acquisition.

While these changes are expressed to be intended to clarify the position, in practice they may make the test less easily applied. For example, the ACCC’s current, forward-looking analysis of the state of competition with and without the merger already allows for the principled examination of changes to competitive dynamics and increases in the closeness of competition between market participants over time.

There appears to be a real risk that the express inclusion of a requirement to consider ‘potential’ competitors could result in a more speculative approach, and unduly lower the bar for competition concerns to be identified in respect of an acquisition.

Given the absence of a compulsory merger filing obligation in Australia, the ACCC is also considering requesting that large digital platforms (eg Facebook and Google) acquiring any business with activities in Australia give advance notice of the acquisition, in order to allow sufficient time for a thorough review. While it is not uncommon for the ACCC to put an industry on notice of its expectation that clearance will be sought for all proposed transactions, it is unclear what the ACCC’s expectation is for ‘advanced notice’ and how this will work in practice.

4. Data privacy (Preliminary Recommendations 8, 9, and 10)

The ACCC has proposed several changes to the Privacy Act 1988 (Cth) (Privacy Act) that are intended to empower consumers to make informed decisions and have greater control over their personal information. These include:

• strengthening notification requirements around collection and use of personal information and introducing third party certification;
• increasing penalties for breaches of the Privacy Act (to mirror new increased penalties for breaches of the Australian Consumer Law); and
• giving individuals a right of action for breaches of their privacy and creating a new statutory action for serious invasions of privacy.

The ACCC is also considering whether entities should be prohibited from collecting, using, or disclosing the user data of Australians for targeted advertising purposes unless users have provided express, opt-in consent.

This requirement could have a major impact on the business models of digital platforms. This kind of advertising is typically a key source of revenue that allows services to be offered to consumers for free.

Finally, the ACCC has also indicated it will further consider whether a ‘right to be forgotten’ (via deletion of personal data) should be introduced, in line with European law.

5. Restricting default ‘search’ and ‘browser’ offerings (Preliminary Recommendation 3)

To address the concern that consumer inertia presents a significant barrier to new entry or expansion for search services and internet browsers, the ACCC is proposing there should be no default:

• internet browser within mobile operating systems; or
• search engine within internet browsers.

This recommendation seems to be intended to reflect some of the remedies that have been ordered against digital platforms and software developers in other jurisdictions. That said, it is a somewhat surprising recommendation and the ACCC has arguably not clearly articulated the competitive harm it is intended to address.

The ACCC contends this change will result in greater consumer choice, but given the popularity of the Google search engine and the limited scope for new entry in internet browsing, it seems more likely to inconvenience consumers without necessarily affecting Google’s competitive position to a meaningful extent.

6. Unfair contract terms (Preliminary recommendation 11)

The ACCC has taken the opportunity to again recommend that unfair contract terms be illegal, rather than merely voidable, under the Australian Consumer Law. Further, civil pecuniary penalties should be applied to more effectively discourage their use.

The ACCC has also indicated it will consider further whether the provisions should be expanded to cover any unfair conduct, rather than simply unfair contract terms. This follows the recent extension of the provisions to protect small business (as well as individual consumers).

Taken together, these changes would represent a significant expansion of what was initially a relatively confined set of provisions.

7. Take-down standard (Preliminary Recommendation 7)

The ACCC has recommended that a mandatory standard be determined by the Australian Communications and Media Authority to ensure that the take-down procedures adopted by digital platforms bring about the effective and timely take-down of copyright-infringing content.