After launching a sector inquiry into market conditions for non-search online advertising in early 2018, the German Federal Cartel Office (FCO) has now published a report for public discussion and further consultations (see here, in German or here for an English summary). The FCO has the power to conduct sector inquiries and to gather information if it suspects that competition in Germany may be impeded in a specific industry. Such sector inquiries can possibly result in separate investigations against individual companies. The FCO intends to use this inquiry to shed light into non-search online advertising’s “black box,” meaning the highly complex automated trading of advertising space, involving a large number of players and diverse information systems.

The FCO’s findings and analysis are highly relevant for all players involved in online advertising—publishers, advertisers, intermediaries as well as businesses and private users of digital services—and for the digital economy more generally, considering that advertising is a core element of online business. Interested parties have until 28 October 2022 to submit their comments.

The European Commission as well as several other competition authorities worldwide (e.g. in the UK, France, Spain, Japan, Australia, Brazil, and the US) have already published their own market studies and conducted investigations into digital advertising.

Online advertising has not only blossomed into a billion-euro business, it is also the backbone of many digital business models that are (co-)financed by online advertising. Users benefit from services that are provided free of charge (e.g. search engines, social media platforms, messaging apps, etc.) while their attention and data are monetized by many platform and network operators through offering advertising space. Thus, understanding the online advertising industry, the various interests of all relevant stakeholders as well as the interplay and possible tensions between the different areas of law (competition law, data protection regulations, consumer protection rules and human rights) is essential for any legislative or enforcement actions.

The FCO’s findings and analysis

To prepare its report the FCO held discussions with relevant stakeholders (advertisers, media and digital agencies, publishers, marketers, and providers of technical services) and analyzed the responses to several rounds of questionnaires as well as studies and articles on online advertising. The inquiry focuses on non-search advertising, i.e., ads that are not displayed in response to search engine queries; it examines the network of players and technical services enabling online advertising (known as “ad tech”).

Here are some key points from the FCO’s 231-page report:

Online advertising—how does this sector work?

The report outlines the enormous development and growth of online advertising over the last 25 years. Like almost all other industries, digitalization has significantly transformed this sector, and this originally offline industry made a massive move online. Today, digital advertising is a fast-moving, highly tech-driven, complex and dynamic system.

There are various ways to trade in online advertising spaces. It can be direct business, where publishers (e.g. website operators) and/or their marketers place advertising inventory by directly dealing with advertisers (which could essentially be any company) or their respective agencies. Or, trading can be done through intermediary services, which have become very important when it comes to publishing, auctioning, and assessing advertising space.

Broadly speaking, a distinction can be made between two types of intermediary services:

First, there are rather traditional integrated intermediary services that offer advertising inventory alongside technical services (such as targeting of users, ad verification services (i.e. preventing fraud, safeguarding a specific advertising environment and monitoring the visibility of the ads) and reporting).

Second, there are open networks of players and offers grouped around digital marketplaces. On these marketplaces, trading in advertising space is fully automated between software systems on the supply and on the demand side, i.e. Supply and Demand Side Platforms (SSPs and DSPs), in real time, and very often in the form of real-time bidding (RTB). This system is referred to as programmatic advertising. The advertising material is provided via ad servers on the advertisers’ and the publishers’ side (publisher and advertiser ad servers). The sphere between the SSP and the DSP is often referred to as the ad exchange. It is important to note that the DSP does not only receive information about the advertising space but may also receive data on the users who will be targeted by the respective advertisement. The system will generate a higher or lower bid depending on the extent to which the user profiles match the advertiser’s target group parameters. This needs to be kept in mind when assessing how limiting access to (personalized) user data can potentially impact the advertising industry (see below).

Market definition and structure

How the market is defined will play a fundamental role when assessing companies’ market shares and power, as these may differ significantly depending on how broadly or narrowly markets will be defined. In particular, it will be relevant if the market definition encompasses the entire ad tech industry or if sub-segments of programmatic advertising may constitute separate markets (as considered by the FCO, see below). The German regulator acknowledges that the market definition in the ad tech space is challenging in view of the characteristics of this industry and the constant technical developments. Accordingly, it states that the preliminary considerations are not conclusive or final but would be subject to individual proceedings.

Currently, the FCO is considering the following product market segmentation:

• The FCO distinguishes between online and offline advertising.
• It further distinguishes between search (i.e. advertising in response to a search) and non-search online advertising (essentially all other online advertising; except potentially for (in-stream) video advertising, classifieds, advertising on portable devices as well as potentially social media advertising).
• As regards non-search online advertising, the FCO distinguishes between (i) direct sales between publishers and advertisers, (ii) integrated intermediary services as well as (iii) programmatic advertising.
• Programmatic advertising may, in the FCO’s view, be further sub-segmented by individual services (publisher ad servers, SSPs/ad exchanges, DSPs, advertiser ad servers, and possibly data management platforms; less clear for ad verification services, targeting, and user tracking).

As regards the geographic market definition, the FCO is considering the markets for ad tech to be at least Europe-wide or even worldwide.

When assessing the market on this basis, the FCO found that Google is the strongest provider of technical services (especially in relation to publisher ad servers, SSPs/ad exchanges, DSPs and advertiser ad servers) as compared with other companies. Although these services could, in principle, be bought from several providers in a programmatic advertising system, the FCO states that many buyers prefer Google’s offering for different reasons (quality, advertising space, access to data, and combination of individual technical services), and that there also seem to be restrictions on the free combination of services from other players on all levels of the value chain.

Changes in access to data and its impact on online advertising

Another key question concerns access to data, which is of utmost importance for the industry since data drives online advertising and the targeting of users. Discussions about the potential risks associated with the collection and use of data have become more common over time, and this trend is not slowing but further accelerating. Data protection authorities and competition regulators have challenged the collection, use and combination of data, private players have taken measures to restrict tracking of users as well as ads and further legislative changes reducing the availability of data are being discussed in the context of the European Digital Services Act and the European ePrivacy Directive.

Key role of access to data in online advertising

As online advertising strongly relies on data, any restrictions on access to data will impact this industry. From the advertisers’ perspective, user data is important for allowing them to display the respective advertisement with a high or at least higher degree of likelihood to only those users that have been selected based on certain criteria (granular targeting). From the publishers’ perspective, it is most beneficial to offer an advertising space to an advertiser that—based on the characteristics of the users of the respective website—believes to get the highest added value and is, thus, willing to pay the highest price. Restrictions on the collection and/or use of data might therefore negatively impact the advertisers’ ability to address the right users. It would likely also lead to lower revenues generated by publishers, although the extent of any such reductions is currently unclear (figures in studies on price decreases and revenue losses when refraining from using cookies and targeted advertising differ significantly, ranging from 4 percent to 64 percent). Equally, consumers might be affected if ad-financed digital business models (such as non-transactional platforms, networks, and apps) decide to move away from free-of-charge services to a fee-based model. They might then need to pay with money instead of their data and attention. It remains to be seen whether they can and would be willing to do so.

Key questions and further analysis

As many digital business models are financed through data-based advertising, the FCO is rightly asking the question if such restrictions will result in a less diverse and effective system of online (in particular non-search) advertising, and what consequences this would have for market players and for the diversity of offers, including those provided to users. It is also asking whether such restrictions will lead to asymmetrical options to the benefit of large providers, which have independent comprehensive access to user data gathered from a variety of their own, mainly user-side services. While some market players are concerned that there will be negative effects caused by restrictions on the collection and processing of data for advertising purposes, the FCO suggests that those could be less substantial. It is calling for further analysis taking into account various aspects.

This would include possible options to switch to other less data-driven business models or not to use them anymore, the role of regulation and enforcement to deal with any negative consequences if the large players were to actually benefit from any restrictions on access to data as compared with smaller competitors, and the weighting of negative consequences resulting from such restrictions against the right to informational self-determination.

Notably, the FCO is concerned that in the current system highly detailed personal profiles are being created (only) for advertising purposes and that there is no control over the use and storage of data due to the non-transparent, highly complex, diverse information systems and large number of players involved in programmatic advertising. This leads to the FCO’s suggestion to consider whether it would be advisable to abandon a data-driven advertising system which might, however, have major implications for market participants and consumers as described above.

Form of competition control in the future

Lastly, a crucial question is which legal framework and enforcement actions will be most effective in connection with online advertising. In view of the characteristics of online advertising and the market structure, the FCO is considering different options for ensuring competitive markets in the future. It considers per-se prohibitions as one possible solution and refers to the upcoming Digital Markets Act (DMA) on the European level, which includes provisions dealing with online advertising and access to data (e.g. Art. 5(2)(1) draft DMA, which prohibits certain practices in relation to online advertising and, in particular, the processing, use and combination of data). The FCO also refers to the new Sec. 19a of the German Act against Restrictions of Competition (ARC). If the FCO finds that a company is of paramount significance for competition across markets, it could prohibit certain behaviors (such as self-preferencing, measures to hinder other companies/competitors, raising barriers to entry in connection with data, etc.) including in the online advertising sector.

However, the FCO seems to be skeptical that individual prohibitions by competition authorities and other individual specific behavioral rules will be sufficient to remove the competitive concerns, as the respective effects might be limited due to the very special characteristics of the non-search online advertising industry. It clearly states that, if so, “more fundamental, large scale, perhaps also structural interventions” should be discussed and is considering two possible approaches: First, such interventions could include (mandatory) standardization of conduct/products ensuring a balancing of the various interests involved provided that the result is acceptable from a competition law perspective. Second, the FCO is considering structural changes/measures that would be even more far-reaching.

Outlook

With online advertising playing a central role in the digital economy and in consideration of the fundamental questions raised by the FCO, relevant stakeholders should engage and share their perspectives and insights. This is important given the complexities of not only the online advertising sector but also the legal landscape, due to upcoming regulations and the interplay with other fields of law such as data protection, consumer protection and human rights.

Also, it needs to be kept in mind that enforcement actions against individual players and regulatory changes can have an impact not only on the online advertising industry (including advertisers, publishers, and intermediaries), but also on the services that are currently offered by publishers to users (especially those free of charge), and that are ultimately financed by online advertising. It will be important—and a challenge—to find the right balance between the various laws and their different objectives, individuals’ rights and interests involved, especially as the effects of measures taken might be Janus-faced (e.g. what would be beneficial from a data protection angle could negatively affect competition in the online advertising sector).