Makan Delrahim, U.S. assistant attorney general for the antitrust division, speaks during a Senate Judiciary Subcommittee hearing in Washington, D.C. (Photographer: Andrew Harrer/Bloomberg)

The Digital Ad Market Is Overdue for Antitrust Review

(Bloomberg Opinion) -- After several high-profile investigations into U.S.-based tech companies that resulted in large fines but little meaningful change in the firms’ practices, the European Union’s antitrust authorities are being asked to open a wide-ranging inquiry into the digital advertising market. It’s long overdue.

The request comes from Brave Software Inc., the company founded by Brendan Eich, one of the original creators of the Firefox browser. Brave also makes a browser, but with a competitive edge: it’s good at blocking ads and the trackers that help companies collect users’ personal data. In a letter, Brave asked Margrethe Vestager, the European commissioner in charge of competition, to begin a “sector inquiry” into online advertising. Brave is urging regulators to look into two aspects of the business: how the biggest players collect data that isn’t specifically for advertising purposes, but then use the information to target ads, making it difficult for others (such as publishers) to compete for ad budgets; and how publishers are forced to sell their ad inventory through a small number of dominant channels that turn the inventory into a commodity and keep most of the revenue.

The first of these two lines of inquiry would concern primarily Google and Facebook, but also Amazon, which has been making big strides in digital advertising. Last month, Brian Wieser, who follows the industry at Pivotal Research Group, estimated that in the U.S. in the first half of 2018, Google and Facebook accounted for 75 percent of all digital ad growth; Amazon was responsible for much of the rest. In Europe, Wieser wrote, “Facebook and Google’s shares are more significant and their shares of gains are likely well in excess of 100%.” This means other industry players shrank in Europe while the two data-hogging giants grew.

Brave’s second area of interest looks somewhat less promising. The ad-tech market, according to estimates published by the research firm IDC in late September, the seven biggest companies only control 28.2 percent of the $12.7 billion market. Google is only the second of these seven, with a 6.5 percent share, behind Paris-based Criteo. Many publishers consider ad tech a parasitical intermediary that doesn’t add much value but gets a disproportionately big share of the revenue, but the industry probably isn’t sufficiently concentrated to warrant regulatory interference.

How ever EU antitrust authorities decide to approach the digital-advertising business, they should definitely look into it. A “sector inquiry” is warranted when officials notice symptoms of market failure. A lack of new entrants is one of these telltale signs. That’s what’s happening in the EU, given the ability of Google and Facebook to capture all of the market growth.

The duopoly even benefits from new European privacy rules, which suppressed ad-revenue growth in Europe in the first half of the year, keeping it to 10 percent year-on-year compared with 23 percent in the U.S. Google and Facebook, with their huge resources, pretended to be compliant and dared the regulators to challenge them. Seven members of BEUC, the group that unites European countries’ consumer protection organizations, last month filed GDPR complaints against Google with their national data protection authorities, and some individual privacy advocates have also started legal action, but it can be a long time before such complaints produce results.

A “sector inquiry” isn’t quick, either. The one into e-commerce began in 2015, and the final report was published two years later. But it had some practical results. This year, some electronics manufacturers were fined for preventing online retailers from setting lower prices on their products. 

It could be more useful for the antitrust authorities to get a view of an entire market than to investigate specific sectors. For example, the European Commission is already investigating AdSense, Google ’s search advertising platform, for various anticompetitive practices such as bans for partner sites on sourcing ads elsewhere. But another fine forcing Google to redraw some contracts won’t change the nature of the digital-advertising business with its persistently shady data collection practices and hard-to-check targeting claims. Useful regulatory interference should start with a deep dive into how the market operates and where it fails.

Although Vestager has said she’d like a second term as commissioner, that ambition is likely to be thwarted by Denmark, which she represents. There’s a good chance she won’t be the bloc’s chief antitrust regulator after next year's European Parliament elections and a change of the guard at the European Commission. She should, however, start the inquiry while she still has time. Her legacy so far includes claiming some spectacular amounts of money from U.S. internet giants, but changing their behavior remains elusive. Vestager should make it easier for her successor to hit the ground running.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg Opinion columnist covering European politics and business. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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