The Spanish Competition Authority (“CNMC”) recently published a study on the online advertising sector in which it analyzes the competitive conditions of the market, with an emphasis on the practices of ‘big tech’.
The study mentions, among other things, some key factors for solving 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 industry
The CNMC says that advertising has become the main source of funding for content consumed on the Internet, and that some of the largest “big tech” companies have grown thanks in part to advertising revenue.
According to the study, revenue for this sector comes from two main channels: i) search advertising, characterized by advertisements that may appear alongside 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 websites and applications.
The CNMC also describes two marketing models used in display advertising:
- The inventory of platforms – notably Google, Facebook and Amazon – which directly market their own offer. In all of display advertising in Spain, these platforms can account for up to 60% of revenue, with growth rates of around 25% per year in recent years.
- Inventory of publishers with primarily national audiences – such as digital newspapers, internet TV, radio or apps – where intermediaries are needed to strike deals with advertisers and media agencies. This is called “open display”. According to the CNMC, Google could have a market share of 50 to 70% in these intermediation services.
The CNMC points out that the market power acquired by “big tech” companies in the marketing of advertising in their own inventory, but also in the intermediation of the inventory of third parties, is due to the major role played by data. These companies collect and accumulate first-hand data from the navigation of consumers within their platforms and allow them to personalize and optimally manage advertising campaigns.
2. The conditions of competition analyzed by the CNMC
On the one hand, the CNMC argues that online advertising generates substantial revenue efficienciesas:
- The ability to personalize, a new feature of online advertising brought about by digitalization which allows advertisers to better reach their target audience and to enhance the advertising space of publishers.
- The ability to measure campaign performance contributes to better decision-making for advertisers, agencies and publishers.
- The entry of new players and media, which expands the possibilities for advertisers and consumers.
- The emergence of new forms of contracting, moving from physical space to digital space, and in which transactions are matched en masse in real time.
On the other hand, the CNMC identifies several problems which could limit effective competition, which could harm efficiency and ultimately consumer welfare:
- High level of concentration: the dynamics of the sector lead to positions that are difficult to dispute, being the main cause of the role of the accumulation of data as a variable of competition and of its interaction with network effects. Data increases the competitiveness of platforms in marketing personalized advertising and can introduce some interoperability issues when using different vendors, generating switching costs and a tendency to focus on a single vendor. Therefore, data is a barrier to entry and growth in this industry.
- The opacity and lack of transparency regarding the information received by advertisers and media publishers is also a major concern for the CNMC. Lack of transparency can hamper optimal decision-making and can consolidate the market power of some operators, especially vertically integrated ones. It may also involve discriminatory conditions or technical requirements to restrict interoperability.
- Leverage: Because digital platforms market their own inventory while participating in the brokerage of third-party inventory, they are used by advertisers as priority or even exclusive buying tools, which may incentivize these platforms to expand their market power from one market to another.
- Self-preference: In addition, vertically integrated operators may have an incentive to discriminate in favor 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 turn to alternative suppliers.
3. CNMC recommendations to reduce anti-competitive problems
Finally, the CNMC also addresses some key recommendations to challenge competition concerns:
- Competition authorities should apply the competition rules as a priority to promote competition in the online advertising market on a case-by-case basis;
- Competition rules should be complemented by regulation on digital platforms;
- Institutional cooperation between all the agents involved is necessary; and
- Competition authorities and regulators should be given more resources and autonomy to organize them flexibly to manage actions in complex markets.