Australians don't play (Base)ball: How the ACCC is taking on Digital Platforms with lessons from the US' oldest pastime

By Morten Nissen, Matthew Bovaird, Thomas Jones, Anthony Rosen

09-2020

Article summary:

  • The ACCC has previously determined digital platforms have significant market power in search, social media and advertising

  • Healthy news media and robust public interest journalism are considered to be critical to the functioning of democracy and society

  • A mandatory bargaining code should be introduced into the Competition and Consumer Act 2010

  • The Code should include a final offer arbitration model similar to that used in major league baseball

  • Both the EU and the UK are considering further regulation of digital platforms

1. Introduction

While regulation of digital platforms is being considered by governments across the globe, the Australian Competition and Consumer Commission (ACCC) has taken a fresh approach by looking to an arbitration model favoured in US baseball, while also learning from the experiences of its European counterparts.

The baseball model of arbitration emerged in major league baseball in the 1970s following the creation of the Major League Baseball Players Association (MLBPA). Until that time, reserve clauses had existed in the major leagues which provided that rights to players remained with the team following expiration of the player's contract.[1] Final offer arbitration was adopted in a collective bargaining agreement as a means of addressing the significant imbalance in bargaining power between team owners and players.

Following release of the initial concepts paper by the ACCC in May 2020, the exposure draft of the Treasury Laws Amendment (News Media and Digital Platforms Mandatory Bargaining Code) Bill 2020 (the "Code") was released for public consultation in July 2020. If enacted, it will amend the Competition and Consumer Act 2010 (Cth), which already includes other mandatory and voluntary industry codes.

As foreshadowed by the Digital Platforms Inquiry Final Report ("Final Report"), the Code will initially apply only to Google and Facebook, the two platforms considered by the ACCC to benefit from a significant imbalance in bargaining power in their dealings with Australian news media businesses.

 

2. Why is the Code seen as necessary?

The ACCC had taken the view in the Final Report that a voluntary bargaining code should be implemented. However when it became dissatisfied with progress, the Australian Government stepped in to direct the ACCC to devise a mandatory code.

The Code is intended to address perceived bargaining power imbalances between media organisations providing news services to Australian audiences ("news media businesses") and the services provided by digital platforms such as Google and Facebook. The ACCC considers that both have become "unavoidable trading partners"[2] as well as rivals to Australian news media businesses.

The Final Report concluded that market power in a range of markets related to online search, social media and advertising enabled both platforms to act as gatekeepers for businesses, including Australian news media businesses, looking to reach an online audience.[3] The Final Report also identified that Australian consumers are increasingly turning to social media platforms, search engines and media aggregation platforms to access news and journalism.

While Google and Facebook's revenues have continued to grow, the Australian media sector faces substantial pressure on revenues particularly as advertisers look to cut costs in light of COVID-19. This is seen by the Government and the ACCC as contributing to a decline of public interest journalism (defined by the ACCC as journalism that performs a critical role in the effective functioning of democracy at all governmental and societal levels)[4].

In addition, the amount of data held by digital platforms and their use of complex algorithms arguably makes it difficult for news media businesses to ascertain the value that Google and Facebook derive from the use of news in their service offerings. This impedes effective negotiations.

 

3. Findings of substantial market power

One of the most significant (and controversial) findings in the Final Report was that Google has substantial market power in the supply of general search services and search advertising services in Australia, and that Facebook has substantial market power in the supply of social media services and display advertising services in Australia.

In relation to Google, the ACCC identified high barriers to entry and expansion in the markets for the supply of general search and search advertising services, which allegedly underpin its substantial market power and insulate it from competition.

With Facebook, the ACCC found that strong network effects, resulting from the large audience size, create a significant barrier to entry and expansion and appear to protect Facebook from dynamic competition. Facebook's market power has arguably been enhanced by strategic acquisitions, and significant economies of scale.

Finally, the ACCC found that data will likely play a significant role in future markets and will be an important factor to be taken into account in assessing the likely competitive effect of future mergers and acquisitions. The ACCC also observed that no other business comes close to the level of data tracking undertaken by Google and Facebook, and concluded that the multiple interactions with users creates a 'virtuous feedback loop'[5] in which they are able to collect more user data, improve their services and thus attract more users and advertisers.

 

4. The Draft Code

4.1 Who will the Code apply to?

Initially only Google and Facebook will be required to comply with the code, although other digital platforms may be included in the future. Unless agreed otherwise, the services covered will be Facebook News Feed, Instagram, Facebook News Tab, Google Search, Google News and Google Discover.

News media businesses wishing to participate in the Code must first apply to the Australian Communications and Media Authority (ACMA). News media businesses will be eligible to participate if:

  1. They predominately produce and publish online 'core news' (defined as journalism about publicly significant issues, journalism which engages Australians in public debate and informs democratic decision making; and journalism relating to community and local events).

  2. They adhere to appropriate professional editorial standards.

  3. They operate primarily in Australia for the purpose of serving Australian audiences.

  4. Their annual revenue exceeded $150,000 in the most recent financial year or in three out of the five most recent financial years.

4.2 What are the key provisions of the code?

The code is comprised of:

  1. A framework for bargaining between news media businesses and platforms;

  2. A set of minimum standards for the treatment of news on digital platform services;

  3. Recourse to binding arbitration if bargaining fails; and

  4. Enforcement powers.

4.2.1 Bargaining and binding arbitration

A news media business can notify Facebook or Google that it wishes to bargain over one or more issues relevant to news on digital platform services. News media businesses may elect to bargain individually or collectively.

Following notification, the parties have three months to negotiate. The parties must attend at least one day of mediation. To assist negotiations, the news media business may make compulsory information requests.

If the parties do not reach agreement within this timeframe, the news media business can elect to bring the dispute to compulsory arbitration. Unlike the negotiation and mediation stages, the arbitration will only consider the issue of payment.[6] The Code proposes 'final offer arbitration' as the method of arbitration. This method of arbitration derived from historic baseball labour disputes. Here, it involves both parties submitting a final offer on the remuneration to be paid by the digital platform within 10 days of commencing the arbitration. Parties then have a further 5 business days to provide comments on the other party's offer. Interestingly, for an issue of great complexity both parties' final offers are limited to thirty pages.

In determining which of the parties' offers should apply, the arbitrator (or a panel of arbitrators) must consider:

  • The direct and indirect benefit that the content of the news media business provides to the digital platform's service;

  • The cost to the news media business of producing news content; and

  • Whether a particular remuneration amount would place an undue burden on the commercial interests of the digital platform's service.

The arbitrator may also consider any submissions the ACCC makes.

Australian courts have decided that "must consider' in this context means to give fundamental weight to it in decision making.

One benefit of this form of arbitration is its perceived efficiency: arbitrators have less discretion than they would in a conventional arbitration, and it is expected results would be produced more quickly. It also seeks to incentivise the parties to submit reasonable offers rather than taking extreme positions. However, given the potential information asymmetry, a risk of perverse outcomes remains.

It is likely that one of the key issues will be the respective valuations of the indirect benefits of news media content. As an example of the variance in valuations, Google' has suggested direct ad revenues were approximately AUD$10,000,000, while indirect benefits were very small.[7] Alternatively, Nine Entertainment's submission to the ACCC assessed advertising revenue for Google and Facebook in Australia at approximately $6B.[8]

If the arbitrator determines that both of the offers are not in the public interest either to the detriment of provision of covered news content or to Australian consumers then, they may adjust one of the offers so that it is in the public interest.

4.2.2 Minimum standards

The code introduces a number of minimum standards that digital platforms must meet when interacting with registered news media businesses.

For example, digital platforms must:

  • Give at least 28 days' notice of algorithm or internal policy changes significantly affecting news media content.

  • Annually provide clear and updated information as to the nature and availability of the data collected about news media business' users.

  • Not discriminate against news media businesses on the basis of their participation in the code.

4.2.3 Enforcement of the Code

The ACCC may take enforcement action in respect of non-compliance with the Code. The ACCC has the power to issue infringement notices or seek significant penalties through the courts.

Where the ACCC has reasonable grounds to believe that a party has contravened the Code, it can issue infringement notices of up to AUD $133,200. Should it elect to commence proceedings, penalties awarded by the court would be the greater of:

  • AUD $10,000,000;

  • Three times the benefit obtained from the conduct; or

  • 10 percent of a digital platform's annual turnover in Australia.

5. The UK and EU experience

Whilst Australia has published its draft Code, the UK and EU are taking steps to catch up. In July, the UK competition authority, concluded its year-long sector inquiry into online platforms and digital advertising.[9] Whilst the UK stopped short of initiating an in-depth 2 year market investigation, it recommended a series of measures to address the strong incumbency advantages and market power held by the large digital platforms – including network effects, economies of scale and unmatchable access to user data – which may inhibit potential rivals from competing on equal terms. The Competition and Markets Authority recommended that the Government should legislate to introduce a new regulatory regime for digital platforms led by a new Digital Markets Unit comprising both an enforceable code of conduct and pro-competitive interventions.

In a similar vein, the EU is also increasing the pressure on the digital platforms. Building on the Cremer Report which examined “Competition policy for the digital era”[10] and the EU’s strategy for “Shaping Europe’s Digital Future”[11], the Commission has recently concluded its consultation on a new competition tool[12] as well as potential measures to address the market power of so-called digital “gatekeepers” or entities with strategic market status.

In particular, under the EU’s proposed Digital Services Act[13], the Commission is planning to introduce ex ante rules to "ensure that markets characterised by large platforms with significant network effects acting as gate-keepers, remain fair and contestable for innovators, businesses and new market entrants." This has the potential to include a blacklist of prohibited practices and principles-based prohibitions governing conduct such as self-preferencing, operating systems, algorithms transparency and online advertising as well as tailor made remedies such as data access, portability and interoperability.

The proposed new competition tool is designed to complement ex post competition enforcement based on Articles 101 and 102 TFEU and to address certain structural problems that the existing competition framework cannot tackle (e.g. monopolisation strategies by non-dominant platforms with market power) or cannot address in the most effective manner (leveraging into adjacent markets). The tool will be designed to enable the Commission to identify and remedy structural problems without the need to establish competition law infringements.

For more details and information, please see our recent articles on the UK’s recommendations and the Commission’s Digital Services Act and the new Competition tool.

 

6. Next steps in Australia

Consultation on the draft Code concluded on 28 August, with final legislation expected to be introduced shortly in Australia. The exposure draft has already generated a reaction from Google which has published an open letter on its AU search page warning of the negative consequences of the Code.[14] This in turn has earned a rebuke from the ACCC.[15] Facebook has suggested that the Code will restrict Australians from sharing local and international news on both Facebook and Instagram if the Code is enacted.[16]

The Code is not a perfect solution, and may see some changes following submissions from all sides. Media businesses may consider that the length of arbitral awards (only one year) is too short and be concerned about how an accurate valuation of the benefits to the platforms can be ascertained. Those who do not meet the eligibility criteria may see the Code as favouring larger news media businesses at a time when smaller or regional news media is under increasing pressure.

This much is certain: all digital platform operators and competition regulators will be paying close attention to its outcome.

[1] J Monhait, Baseball Arbitration: An ADR Success: Harvard Law School, Journal of Sports & Entertainment Law 2013, Vol. 4 pg. 109.

[2] Concepts paper pg. 4.

[3] Digital Platform Inquiry Final Report pg.6.

[4] Digital Platform Inquiry Final Report pg. 19.

[5] Digital Platform Inquiry Final Report pg. 11.

[6] The Competition and Consumer Act 2010 has otherwise generally adopted a conventional arbitration approach such as under Part IIIA.

[7] https://australia.googleblog.com/2020/05/a-fact-based-discussion-about-news.html.

[8] https://www.accc.gov.au/system/files/Nine.pdf pp.7-8.

[9] CMA, “Online platforms and digital adverting” -Final Report, 1 July 2020 https://assets.publishing.service.gov.uk/media/5efc57ed3a6f4023d242ed56/Final_report_1_July_2020_.pdf

[10] “Competition policy for the Digital Era”, Cremer et al. https://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf

[11] https://ec.europa.eu/info/strategy/priorities-2019-2024/europe-fit-digital-age/shaping-europe-digital-future_en

[12] https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12416-New-competition-tool

[13] https://ec.europa.eu/digital-single-market/en/digital-services-act-package

[14] https://about.google/intl/ALL_au/google-in-australia/an-open-letter/.

[15] https://www.accc.gov.au/media-release/response-to-google-open-letter.

[16] https://about.fb.com/news/2020/08/changes-to-facebooks-services-in-australia/.

 
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