The Spanish Competition Authority (“CNMC”) has recently published a study about the online advertising sector in which it analyses the market competition conditions, with a stress on ‘big tech’ practices.
The study mentions, among other things, some key factors to tackle the set of competition problems identified, the role of transnational cooperation and the urgent need for more resources for competition authorities and regulators.
1. Overview of the online advertising sector
The CNMC claims that advertising has become the main source of funding of content consumed on the internet, and that some of the largest ‘big tech’ companies have grown especially financed by advertising revenues.
According to the study, the revenue in this sector comes from two main channels: i) search advertising, characterised by advertisements that may appear alongside with keyword searches in general search engines; and, ii) display advertising, which results from advertising in the form of video, banners, social media formats, etc., while browsing on websites and apps.
The CNMC also outlines two marketing models used in display advertising:
- The inventory of platforms –notably Google, Facebook and Amazon–, which market their own offer directly. Within the total display advertising in Spain, these platforms can account for up to a 60% of the revenues, with grown rates around 25% annually in the recent years.
- The inventory of publishers with a primarily national audience –such as digital newspapers, internet TV, radio or apps–, where intermediaries are necessary to close deals with advertisers and media agencies. This is the so-called ‘open display’. According to the CNMC, Google may have a market share of 50-70% in these intermediation services.
The CNMC highlights that the market power acquired by the ‘big tech’ companies in the commercialisation of advertising in their own inventory, but also in the intermediation of third-party inventory, are due to the major role played by data. These companies gather and accumulate first-hand data from consumers’ navigation within their platforms and allows them to personalise and optimally manage advertising campaigns.
2. Competition conditions analysed by the CNMC
On the one hand, the CNMC argues that online advertising generates substantial efficiencies, such as:
- The capacity for personalisation, a new feature of online advertising brought by digitalisation which allows advertisers to better reach their target audience and revalue publishers’ advertising space.
- The capacity for measuring the performance of campaigns contributes to a better decision-making by advertisers, agencies and publishers.
- The entry of new players and media, which broadens the possibilities for advertisers and consumers.
- The emergence of new forms of contracting, shifting from the physical to the digital space, and in which transactions are mass matched in real time.
On the other hand, the CNMC identifies several problems that could limit effective competition, which may harm efficiency and, ultimately, consumer welfare:
- High level of concentration: the dynamics of the sector lead to positions that are difficult to contest, being the main cause of this the role of data accumulation as a competition variable and its interaction with network effects. Data increases the competitiveness of platforms in marketing personalised advertising and may introduce certain interoperability problems when using different providers, generating switching costs and a tendency to concentrate in a single provider. As a result, data constitute a barrier to entry and growth in this sector.
- Opacity and a lack of transparency regarding the information received by advertisers and media editors is also a key concern for the CNMC. The lack of transparency may hinder optimal decision-making and may consolidate the market power of certain operators, particularly vertically integrated ones. It may also entail discriminatory conditions or technical requirements in order to restrict interoperability.
- Leveraging: Due to the fact that digital platforms market their own inventory while at the same time they take part in brokering third party inventory, they are used by advertisers as priority or even exclusive buying tools, which can generate incentives for these platforms to extend their market power from one market to another.
- Self-preferencing: In addition, vertically integrated operators may be incentivised to discriminate in favour of their own services. This risk would be caused by the market power and interoperability advantages of vertically integrated operators, which limit the ability of advertisers to switch to alternative providers.
3. CNMC’s recommendations to reduce anticompetitive problems
Lastly, the CNMC also addresses some key recommendations to challenge the competition problems:
- Competition authorities must apply competition rules as a priority to promote competition in the online advertising market on a case-by-case basis;
- Competition rules should be complemented with the regulation on digital platforms;
- Institutional cooperation between all agents involved is necessary; and
- Competition authorities and regulators should be provided with more resources and autonomy to organise them in a flexible manner to handle actions in complex markets.