A misdirected attempt at Big Tech regulation

Posted 10. February 2021. 15 min read.

Recently, new legislation commonly referred to as the News media bargaining code made it to the Australian Senate floor. The proposed law is a homage to anti "Big Tech" attitudes which have been popular of late. With a likely election in 2021, the Morrison government is looking to project strength and 'stand up' to the 'anti-competitive' practices of Google and Facebook.

Whilst it has been introduced as a measure against the supposed "market power imbalances" between digital platforms (Google and Facebook) and news media businesses (NMB's), the legislation itself does not live up to this ideal. The code merely ensures the transferal of revenues from one group of billion-dollar companies to another group of billion-dollar companies the government prefers. The code is merely a show of political strength in opposition to the increasing political power of Google and Facebook.

What exactly is the law?

Before delving into the specific issues associated with the code, it may be useful to understand in more detail what the legislation would entail. In short, any news media business (NMB) with annual revenues larger than $150,000 which produces “core news content” will be given special privileges in their interaction with Facebook and Google, except for SBS and the ABC.1 To summarise the privileges NMB’s would be privy to:

Bargaining and Arbitration Rules: The government has signalled its view that Google and Facebook are to "revenue share" with news businesses based on the estimated value their content brings to Google and Facebook. In essence, since Google and Facebook display the links to news, they are to pay news businesses for this privilege, as without these links their platforms would be significantly worse off. The terms of this revenue share is to be decided by the government unless an agreement can be made between the digital platform and the NMB
Special notification and access to user data, algorithm changes, display changes: If Google and Facebook decide to change any core part of their ranking algorithms or the visual display of content above a certain threshold, news businesses are to be informed. News businesses will also be given special access to user data and analytics
Non-discrimination: If any news business chooses to participate in the code, Google and Facebook may not discriminate against them in any way compared to other news businesses (i.e. not show their content). Thus if Google or Facebook decide they do not want to pay a specific news provider, and hence not show the news of that particular news provider, they cannot show any news whatsoever. This one is the real kicker in many ways.

Melanie Silva (Managing Director and VP, Google Australia & New Zealand at Google) explaining point 3 on LinkedIn

How did we get here?

Scott Morrison initiated the Digital Platforms Inquiry in 2017. This led the ACCC (Australian Competition and Consumer Commission) to develop several policy proposals designed to check the market power of Google and Facebook. Proposals ranged from data privacy protection, handling the spread of misinformation and how to handle mergers and acquisitions. Out of this inquiry, the government ignored most of the policy proposals, instead choosing to focus on only one issue – revenue sharing between Google, Facebook and NMB's. The government modified a recommendation from the ACCC for a voluntary code of conduct between digital platforms and NMB's into a mandatory code. Then they narrowed their focus on this issue.

Instead of increasing competition or protecting the consumer as anti-trust legislation normally would, the code is merely a show of political might and a metaphorical middle finger against "Big Tech". Politically popular, right down the isle painting the "us vs them" narrative popularised by the likes of DT. To consider the code as a bad attempt at regulating economic power is a mistake, for whilst it can certainly be construed in that way, regulating the economic power of Google and Facebook was never the intention.

For many years the government has been the ultimate monopolist of political power, and the only body capable of regulating the rights and responsibilities of Australian citizens. Google and Facebook in many ways represent a challenge to that power, both in the way that they can regulate their platforms which serve as modern-day town halls – and in the way they give power to grassroots movements and small media companies. Between core businesses of Google and Facebook and the subsidiaries they own, including Instagram, WhatsApp, Messenger, YouTube between 75-95% of Australians interact with at least one of their services a month. A recent survey of 1600 Australians found that they spend almost 30 hours in an average week split between Facebook, Instagram and YouTube.2

These interactions determine what people think, how they act and if these platforms decide a certain practice is unacceptable, it becomes unacceptable. Whilst the government controls behaviour in the real world, Facebook and Google control the virtual world. This is where Scott Morrison's quarrel truly lies, not in the meagre economic power of Google and Facebook, which as well see is much smaller than you might think.

Combined Google and Facebook generate around $4.97B in revenues (2019) – nothing outstanding compared to the revenues of Coles, Woolworths and Aldi who dominate 75% of a $130B food and grocery market.3 Apparently, the fact that Google and Facebook account for 80% of the spend in the small market of online advertising (Around $7b) is worrying. This desperately needs to be rectified by forcing them to pay more money to the news businesses who are unable to generate the same revenues they used to. News businesses never really made any money out of online advertising; classifieds were their main source of revenue in the early 2000s and websites such as Gumtree, Seek, carsales.com.au, realestate.com.au (owned by News Corp) and Domain (owned by Fairfax) took away these revenue sources. Between 2002-2018, newspaper revenues in Australia declined by 4.4B to 3.0B, with a -$1.3B loss of classified revenues accounting for 92% of the decline.4 The online advertising market which Facebook and Google now dominate was largely created by them, it was not stolen from News businesses.

What are the issues with the law?

On so many fronts, the law does not make sense. That being said, those in our democracy that work to keep the government in check have had nothing to say. Did you think The Sydney Morning Herald or The Australian were going to shoot themselves in the foot? Of course not - they are being offered the lifeline of a century. Whilst the old guard of media scratches to stay alive, with their relevance diminishing day by day, smaller media companies have not yet had time to build credibility and influence as digital-first journalists. New age media companies like Michael West Media are doing the right thing and questioning the law, but those with the influence to question it are silent. There was one good article in the AFR - but other than that you are hard pressed to find anything negative. Instead of following along with the charade, why not consider a few of the inherent flaws in the proposed?

Antitrust legislation is about protecting the consumer from anti-competitive practices - where is this happening exactly?

Traditionally the grounds for antitrust (i.e. anti competition) actions are based on two facts:

If current market participants have too much market power, they will be able to set market prices above competitive market prices, to the disadvantage of consumers
If market participants remain monopolists for too long, the rate of innovation (borne out of competition) will decrease to the disadvantage of consumers

Antitrust regulation was always centred on protecting the consumer, ensuring they are protected from the inefficiencies in prices and technology brought on by a monopolist. If we then move back to the News media bargaining code, we see that almost none of the regulation is directed at this cause in any way. Without even diving into the discussion of whether Facebook and Google are monopolies, why exactly is the government intervening to force one set of multi-billion-dollar businesses to pay another set of multi-billion-dollar businesses?

Even if we are to assume Facebook and Google are monopolists in the online-advertising market and have too much market power – why are we giving that market power to another set of monopoly-like businesses? If news media businesses are struggling to survive, there is probably a reason for that. As they fail, businesses who are better equipped to do the job will take over. Another point to consider is that there is no denying the reality of Google and Facebook's market power. If one of them were to leave Australia this would hurt consumers much more than if Nine or Newscorp went bankrupt. Small businesses all across Australia use Google and Facebook for marketing - their livelihoods depend on the availability of these platforms.

If journalism is a public good, why do we keep cutting funding to the ABC and SBS? Why should we exclude the ABC and the SBS from payment for content?

One of the key recommendations of the digital platforms inquiry (DPI) is that public broadcasters should be provided with stable and adequate funding. Even as funding for the ABC has fallen off a cliff with successive Coalition governments since 2014, the government now further chooses to exclude the ABC from a new hard-earned commercial source of revenue. So Google and Facebook are allowed to fund Sky News and Nine, but the ABC and the SBS miss out on revenue and taxpayers have to make up for that shortfall?

If we are interested in supporting independent journalism, why don’t we?

Another recommendation from the DPI is to increase grants for local journalism. With an expanded Regional and Small Publishers Jobs and Innovation Package, the ACCC argues the government will be able to help fund areas of public interest journalism at risk of under-provisioning by the Australian media market. It makes sense that the code includes a $150,000 lower threshold for businesses as well as registration with the Australian Communications and Media Authority. Instead of helping young businesses adapt and innovate, the code gives advantage to incumbents already established in the market

To tame the market power of Google and Facebook - why don’t we go after the source of it?

Google and Facebook have market power in two separate markets: their respective consumer categories - social networks for Facebook and search for Google - and together they have power in the online advertising market. These two forms of power complement each other - the more people use search, the stronger Google's advertising offering (both AdSense and keywords); if more people use Facebook or Instagram, Facebook can better target customers for specific characteristics which increases their advertising offering. These form a positive feedback loop whereby a better advertising offering increases the capital available for investment and expansion - leading to a better product and then a better advertising offering. This complements the other positive feedback mechanism: their network effects. By this I mean, the more people use Facebook the more useful it becomes as a service. More searches on Google leads to more accurate results.

As more people use each service, the greater the integration possibilities (e.g. AdSense and Pixel). Thus their marketing prowess depends on users using their services which are positively reinforced by network effects. We see then that Google and Facebook's market power does not come from anti-competitive behaviours; there are specific strategic reasons for which they dominate their markets. Whilst they are no stranger to throwing cash at any competitor who even dreams of being a threat, this is not at the heart of their power. So forcing Google and Facebook to pay for news content will do very little to their market power - they will see the payments as a tax and pass them on to consumers. Even if they are free services, there are ways that their cost structures affect you as a consumer.

Alternative strategies

The proposed News media code is a rort. Whilst the government isn't funnelling taxpayers money directly into the hands of Newscorp and Nine they might as well be; they are sacrificing consumer well-being instead. There is simply no denying the market power of Google and Facebook, however, and if one positive were to come out of this legislation then it's to bring to the public attention the market power of Google and Facebook. This should be the mandate of the ACCC - how to effectively diminish the market power of Facebook and Google. What are some strategies to do this?

1. Tax Google and Facebook properly

The OECD nations have been working on a proposed plan to tax digital companies more effectively, but the plan has been delayed due to COVID-19. Google for example generated gross revenues of $4.8B in 2019, then trimmed this down to a $1.2B effective figure, claiming Google Australia is a mere 'agent' for its US subsidiary and the revenue reported is only a commission for selling the US-based product. The rest is passed on to the US via a Singapore based subsidiary. This "effective" revenue figure means Google's tax bill in 2019 was only $60m. In 2019 Facebook's revenues were 674m yet they paid a little under $20m in tax through a similar reselling arrangement. This article explains the tax situation a little better than I could.

The problem with the current model is that multinational companies can choose any arbitrary "cost of sales" figure from their originating country and pay as little tax as they can reasonably expect to get away with by using a reselling agreement. This should be a top priority for reform. A strategy to increase tax receipts could hard caps on the ratios between revenues, taxes and local costs. If Google wants to justify nearly $3B in cost of sales, more of this should be paid to Australian workers. This will force multinational companies to spend money on product development in the countries where their revenues come from - where they are extracting dollars from the economy. In many ways, the government has been fighting a good fight here - but more needs to be done. Taxes could also be applied on a user basis - whilst Google and Facebook will always remain free, the government could force consumers to pay taxes for over usage and limit the addictive nature of the platforms.

Taxing Google and Facebook, and even most multinational companies today, is a difficult process. I am not dismissing the complexity of this reality. We must keep progessing, attempting to reform and ensuring that these companies pay their fair share of tax. What we SHOULD NOT do is say, "this is too difficult - lets use sneaky tax which will mean revenue stays on our shores, even if that isn't in the governments purse" (a.k.a news media code).

Progress takes time. It's difficult. Progress does not happen overnight.

2. Tracking capabilities/privacy

It should not be the case that every time you visit any website, either Google or Facebook knew you were there. It should not be the case that you should see the same advertisements for a pair of sunglasses on every website that you visit, because Google saw you visit the Oakley website once. By default, browsers should operate in a form of privacy mode whereby they do not store the previous sites that you visit. Facebook and Whatsapp messages should be encrypted by law. Google should not track your location by default. Your browsing data (i.e. both your history on Chrome and your scrolling/viewing data) should be opt-out from storage. Here we are focusing on how to fund news businesses out of the consumers pocket, but there remain mountains of work to be done on reform for consumer privacy. Any of these regulations will make it significantly more difficult for Google and Facebook to maintain the monopolies they already have.

Google and Facebook are used differently by users in every country, and as Australians, we must regulate them to suit our interests. Recently Apple announced IOS 14 will have new privacy-protecting features which force apps to ask you for permission to track you across different apps and services. The update has got Facebook very upset about its ability to track you without most consumers being aware. Why do we leave initiatives like this up to Apple? Following the Cambridge Analytica scandal in 2016 the EU responded with the GDPR - where was Australia's response?

The mere act of making users aware of just how intensely their privacy is being violated will have a lasting impact on Google and Facebook. Another example of just how easy it would be to seriously damage their standing would be to force all browsers to make a user choose their search engine. Currently, Google Chrome, Firefox and Safari which approximately account for 85% of browser usage across the globe all use Google as their search engine by default. Imagine if when you download, and once per month or quarter, the browser forces you to reassess your default search engine? A browser like DuckDuckGo is MUCH more private and respects users countless times more than Google does.

3. Take Protecting the consumer seriously

If we are so interested in protecting the consumer, why don't we begin by protecting them from the serious harms caused by Facebook, Google, Instagram and YouTube every day? We allow these platforms to amplify hate, spread fake news and negatively impact the well-being of many of their users. The often-quoted section 230 in the US constitution gets a lot of attention, why is there no equivalent in the Australian legislative landscape?

For the most part, Facebook and Google are free to let most content on their platforms, despite the repetitive breaks of consumer trust and damage to our civic institutions. These platforms allow for the spread of every increasingly outrageous conspiracy theories like QAnon, the 'Great Reset' and to think these issues are isolated to the US is a mistake. The recent "insurrection" in the US was not planned in community halls - it was organised and gained steam on these platforms. If we are serious about calling these businesses monopolies, we need to regulate them as if they are. There should be special departments in the government dedicated to ensuring the motives of companies with revenues close to the GDP of small countries do not cross the interests of the Australian people.

Concluding remarks

It becomes easy to see then that the governments attempt to regulate the market power of Google and Facebook is nothing more than a hand-out for large media companies. If we are serious about regulating Google and Facebook, which we should be given the large and often destructive role they play in our society, then we should reassess the direction of our legislative efforts. The consumer should be prioritised and protected, not large media companies. Regulating Google and Facebook will always be difficult and the likely path for us to take is to assess each issue they present on its own merits with consumer protection being the north star. Cars were once an unregulated industry, however, the myriad of consumer safety, environmental safety and market-based regulations have made the auto industry a much better version of itself. There is no reason to expect we cannot do this in the digital world and we need to start by directing our legislative efforts in the direction of the consumer. The complexity of these modern businesses will require a focus unparalleled in scope to previous regulatory drives and if protecting the consumer is not what we aim for - we are very likely to fail.