Silicon Valley, regulators brace for Australia’s digital platforms report

4 July 2019 10:20am

3 July 2019, by James Panichi and Laurel Henning*

A relatively small jurisdiction at the bottom of the world, more than 12,000 kilometers from Silicon Valley, is about to launch a regulatory experiment that could have a lasting effect on the business models of platforms such as Facebook and Google. The world’s technology giants are bracing for what Australia has in store.

The final report from the Digital Platforms Inquiry has been handed to Australia's federal government, just as Canberra embarks on rounds of complex political horse-trading in the Senate to get unrelated tax measures passed. That suggests the release of the platforms report may be placed on the back burner.

But whenever Canberra decides to make public the report by the Australian Competition & Consumer Commission, its final recommendations are likely to reverberate around the globe. It will be the first comprehensive regulatory blueprint examining the operations of the US-based platforms.

The recommendations won’t be binding — but that fact should offer the platforms little comfort. The recently re-elected Australian government has been one of the fiercest proponents of tech regulation, as recent laws on encryption and "abhorrent violent content" suggest.

The government’s gun is cocked and ready; the ACCC’s recommendations may simply provide Canberra with the ammunition it’s looking for. It will also mark the first salvo in a global regulatory war that platforms may struggle to contain.

For Facebook and Google, the two companies singled out for attention in the ACCC’s probe, the stakes couldn’t be higher. By the end of 2019, Australian lawmakers may be toying with measures that include the establishment of the world’s first fully-fledged digital regulator.

If adopted, that regulatory centerpiece would bring with it powers for officials to carry out deep-dives into the algorithms that underpin platforms’ relationships with advertisers, media companies and third-party users of ad-tech services.

But even a milder recommendation distributing additional powers to existing regulators would offer platforms little respite, with consumer-based privacy measures and oversight of algorithms still likely to be among the final report’s most newsworthy takeaways.

Could it get any worse for platforms? In short: yes.

Recommendations may include a call for tougher laws to equip Australia’s competition regulator with the power to assess digital sector M&A deals involving start-ups based on forward-looking criteria in a bid to prevent “killer acquisitions” designed to neutralize nascent rivals.

Underpinning the call for ex ante assessments is the ACCC’s belief that the control of vast reservoirs of data should be factored into such considerations. That has raised the hackles of an industry that has steadfastly argued that data is open to anyone who can collect and understand it.

All this suggests that the ACCC’s final report could prove a painful affair for platforms — not so much due to its local impact, but because of the new tools it will present to the global community of regulators as they consider their own next steps.

As we await the publication of the report, MLex correspondents around the globe have assessed how the recommendations will fit into a rapidly evolving digital regulatory landscape.

Enter the digital regulator

When the ACCC’s interim report was published in December, public attention immediately focused on draft recommendations that called for the establishment of a dedicated digital industry regulator.

As envisaged by the interim report, that regulator would make its presence felt in every nook and cranny of platforms’ operations — from how they connect readers to media content to the power dynamics in their dealings with advertisers.

The industry’s backlash against the proposal was as predictable as it was brusque. MLex went on to discover that platform advocates** in Washington, DC, were seriously concerned by the prospect of the Australian model catching on in other jurisdictions.

But by that time, it was already too late.

In the UK, a report compiled for the government concluded that there was a need to create an independent “digital markets unit” in the country. Work on the report was led by Professor Jason Furman, once an adviser to former US President Barack Obama.

The Furman report described a unit charged with developing a code of conduct, with input from the industry, to be applied only to the most powerful tech companies deemed to have “strategic market status.”

As an interim measure, the report also recommended the creation of a “virtual” unit supervised by the UK’s competition and telecoms regulators, tasked with carrying out market studies and sector-specific investigations to pave the way for future regulation.

Policymakers in the US are also starting to talk more about the idea of creating a specialist digital platforms regulator, including one that would incorporate antitrust, privacy and intellectual property under a single regulatory umbrella.

In May, a study commissioned by the University of Chicago’s business school called for the creation of what was defined as a digital authority to better regulate multi-sided digital platforms such as Facebook and Google.

The study, by the George J. Stigler Center for the Study of the Economy and the State, proposed several changes to current US antitrust laws.

The report suggested that the application of different rules to companies with “bottleneck power” — defined as situations in which consumers rely overwhelmingly on a single provider — was making it difficult for other providers to gain access.

Another idea proposed in a new book by Harold Feld, a senior vice president of Public Knowledge, a digital rights group in Washington, DC, would regulate not only competition but also privacy and intellectual property issues for digital platforms. 

Feld’s book, “The Starfish Problem,” proposes a different metric for measuring the market power of digital platforms — “cost of exclusion,” or COE.

The digital platforms regulator proposed by Feld and Public Knowledge would measure COE when the cost to a business or individual of exclusion from a platform was significant. In such cases, the platform would be assumed to have market power.

Stopping ‘killer acquisitions’

We didn’t need the ACCC’s draft report to tell us that the Australian competition regulator harbors deep-seated concerns that digital platforms are using pre-emptive acquisitions of start-ups to kill off competition.

In a speech in May, ACCC Chairman Rod Sims name-checked Facebook’s 2012 acquisition of Instagram, saying that the deal had, arguably, “eliminated the threat of a substantial potential competitor”.

“If the prospect that the target will become an effective competitor is small, but the potential increase in competition and consumer welfare is large, greater weight should be put on the potential for competition,” Sims said.

The ACCC's draft recommendations suggest that the regulator is prepared to go even further. Ideas on the table include a proposal tailor-made for platforms such as Facebook or Google that they should “provide advance notice of the acquisition of any business with activities in Australia.”

The notion that regulators should assess not just start-ups’ current competitive status but also their potential to develop to become rivals has been brushed off by big technology companies.

Speaking to MLex recently, Facebook’s associate general counsel for competition and regulation, Samantha Knox, said that at the time of acquisition “Instagram sold no advertising, it had no revenue, it had zero plans to begin selling advertising.”

To suggest that Instagram would have developed into what it is today without Facebook’s stewardship was absurd, Knox said. 

“Our continued innovation on Facebook itself and Instagram have served to grow Facebook's presence in online advertising and has enabled us to compete more fiercely against the industry leader: Google,” she said.

The Australian regulator’s worldview on acquisitions may not appeal to platforms, but it appears to be in step with the perspectives of its international counterparts.

Germany and Austria have already added a “deal value” component to their merger control systems to try to catch suspected killer acquisitions that fall below the normal criteria for merger notification.

Under those rules, put in place in May 2017, companies must notify mergers to the national competition authorities if two conditions are met: the deal value exceeds 400 million euros ($454 million) in Germany or 200 million euros in Austria; and there’s a sufficient link to the respective market.

Such proposals are under consideration in other jurisdictions such as the Netherlands, France and Brazil.

In the UK, the Furman report recommended updating the country’s merger policy to ensure that the competition regulator could be “more forward-looking and take better account of technological developments.”

The report suggested updating the UK’s merger guidance to introduce new criteria for blocking digital deals or imposing tougher conditions for approval. That was required because “historically there has been little scrutiny and no blocking of an acquisition by the major digital platforms.”

In Brussels, a report compiled for the EU’s antitrust watchdog by three academic experts, published in April, struck a more cautious note, advising against changing merger thresholds to catch killer acquisitions.

The EU report advised the regulator to wait and see how thresholds introduced in Germany and Austria performed in practice. But it also urged the regulator to be vigilant and to consider updating its methodology for determining whether such mergers might harm competition.

These international trends are in sync with the ACCC’s understanding of the regulatory challenge that lies ahead. 

“If an established company can take out potential competitors as they emerge, then obviously competition is going to suffer, and it is a challenge … for regulators around the world to [find ways to stop those mergers],” former ACCC Commissioner Roger Featherston told MLex recently.

Unsurprisingly, his outlook offers little appeal to fledgling start-ups that want to be acquired and need platforms’ money to achieve their goals. “If companies can't get bought, they won't get started,” StartupAus Chief Executive Alex McCauley told MLex in a recent interview.

Data dimension

The ACCC will reject the accusation that it has engaged in "mission creep" — that a probe designed to be narrowly focused on platforms’ impact on Australia’s media and advertising industries has strayed into unrelated areas.

That criticism is often directed at the ACCC’s concerns over data. The regulator has suggested that platforms’ control of vast swaths of data raises red flags when it comes to both competition and privacy; data control has left platforms with substantial market power that could become problematic in the future.

Facebook has been among the critics calling for the ACCC to focus on solutions that would give Australia’s moribund news industry a new lease of life. However, the ACCC has argued that digital platforms’ control of data, and its impact on the advertising and media industries, are fundamental to its inquiry.

On the issue of privacy, Sydney-based specialist digital and technology counsel Melissa Fai, of law practice Gilbert & Tobin, said that Australia’s current privacy laws sometimes failed to offer “clear guidance” in their current form when it came to “new uses of personal information.”

That, Fai argued, left the door open for the ACCC to push for the development of a code of practice for digital industries that “would recognize the potential risk to privacy” that platforms present.

But as for how competition may be affected by platforms' control of data — an issue that Australian newspaper publishers have placed front and center in their campaign against Facebook and Google — the technology giants are immovable.

Facebook’s Knox told MLex that if a dataset acquired were unique, it might pose a concern over a reduction of competition. However, collecting data wasn’t in itself problematic, given that the data was available to all.

Google argued a similar point in its final submission to the inquiry, saying that data was “non-rivalrous” and that users often “multi-home,” meaning that several online providers can collect data from the same users.

The ACCC isn’t buying those arguments. The regulator’s interim report is peppered with expressions of grave concern over both the control of data and the means by which the data is acquired —  a concern shared in other jurisdictions.

In February, Germany's competition authority found that Facebook had abused its market dominance in the country by making the use of its social network conditional on the collection of user data from multiple sources

The German watchdog held off from fining the company, but ordered it to change the way it collects data from users in its jurisdiction. Facebook is appealing the decision at the Düsseldorf Higher Regional Court.

In the UK, the Furman report’s proposed digital markets unit would be tasked with “enabling greater personal data mobility and systems with open standards where these tools will increase competition and consumer choice.”

The EU antitrust watchdog's April report by academic experts concluded similarly that there was a need for regulators to give more guidance on data pooling, and acknowledged that there may be grounds for sector-specific data-sharing requirements.

New regulation, outside of the scope of the EU’s competition enforcement, might be used to encourage consumers to use multiple platforms by facilitating data portability and interoperability, the report said.

*Additional reporting by Michael Acton, Matthew Newman, Leah Nylen and Mike Swift

ABA 2019