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October 5, 2020

Google’s Aussie plea

"Unfair standard of arbitration."

By Shane Hill

Amidst the seismic disruptions brought upon businesses in 2020, including the rush to enable remote operations through cloud-shift, a new front has opened in the battle for digital regulation.

In an open letter first published in August (and subsequently updated), Google brought attention to what it perceives as a fundamental threat to its operations ‘down under’.

So, what is this threat exactly, and why does it matter?

Proposed by the Australian Competition and Consumer Commission (ACCC), the stated aim of the News Media Bargaining Code (the Code) is to redress the imbalance between traditional news businesses in Australia and platform giants such as Google, Facebook, and others.

Responding to the proposal, managing director of Google Australia and New Zealand Melanie Silva wrote: “[the] Code would put the free Google … and YouTube services [that Australians] use at risk.”

Quite aside from how the Code reshapes the playing field for news locally could well prove less important than how Google chose to fight its case: direct on its platform. Fundamentally, it is how Google and similar companies wield their platform dominance that regulators like the ACCC intend to moderate.

Alphabet have prior form with the direct-to-audience approach: for example, when the EU’s Copyright Directive threatened its business model. Senior YouTube execs Susan Wojcicki and Robert Kyncl took to their platform to lambast the censorial burden the proposed regulation would entail. The European Parliament approved an amended version – including freedom of expression safeguards – of the Directive in September 2018, enshrining the principle that content platforms must pay for the content they use.

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This new fight matters: by disseminating its policy position via its now-pervasive search platform, Google may well have paved the way for the ACCC to set a precedent for other regulators to follow.

Echoes of historic antitrust battles emerge

Fundamentally, Google Search is an advertising business, a principle on which the Code is built.

In the second quarter of 2020, Google Search captured global revenues of US$21.3bn for its parent Alphabet. Although down on the US$23.6bn for the same period in 2019, Search is performing admirably against the catastrophically diminished revenues of the traditional firms to which the platform is a gateway.

Regulators – ever vigilant to promote fair competition – are increasingly concerned about the platform dominance of firms like Google and Facebook, seeking remedies that echo the antitrust hearings against Microsoft in the late 1990s. Like these contemporaneous concerns, Microsoft had sought to maintain its competitive advantage by pushing adjacent business lines through its near-total dominance of the operating system and office productivity markets. Ultimately, it was forced to remedy its anti-competitive behaviours.

Silvia claims a pre-emptive redress, stating that every year Google pays “Australian news media businesses millions of dollars. Google does not … steal news content, [it] just links [users] to what [they] are looking for.”

Yet, as its revenues show, its position as content arbiter has tangible value beyond pay-per-click for news.

Belatedly, the firm has offered to pay traditional news businesses more to license content, but this alone is unlikely to satisfy regulators or traditional news media businesses in their desire for free-market competition.

Platform giants are fighting regulatory complexities on multiple fronts

Be in no doubt: this latest policy battle threatens the business models of the platform giants.

Although these firms dominate online advertising – with Google and Facebook accounting for around three in every five dollars of online ad spend – the ACCC’s action may well carve out a small but significant new share for traditional firms.

Alphabet is on record acknowledging this risk, citing in a recent filing that it “and other … technology companies are experiencing increased regulatory scrutiny … [which] may harm our business”.

As digital services taxes emerge; privacy, consumer protection, and competition are coming into sharp focus through directives such as the European Digital Services Act. Unsurprisingly, Google and others are diversifying lobbying activities, by supplementing direct regulatory engagement with a platform-enabled approach.

Diversification of lobbying illustrate the value of online advertising

This shift may not be completely organic.

Google, for example, spent around €8m lobbying the EU in 2018. By comparison, Facebook allocated some €4.25m, Apple shelled out about €2m, and Amazon spent around €1.75m in 2019. No funding information for Google was received from EU institutions for 2019.

Although the platform giants secured significant engagement with EU policymakers during the Juncker Commission, a sea-change has arisen under the Von der Leyen Commission.

From 2014 through 2019, Google (at number one), Microsoft (number eight), and Facebook (number nine) all featured in the top ten by number of engagements with senior policymakers. Since 2019, only Google remains in the top ten, albeit with curtailed influence at number eight overall.

So, the platform-enabled approach to lobbying its user base of Google and others is striking in its audacity.

In her letter, Silva articulates an “unfair standard of arbitration” in the Code. She sets out the table-stakes: “[In a] system … [of] binding final-offer arbitration, … the parties each put forward [an] offer and the arbitrator [decides], guided by set criteria. Some of the amounts being suggested by news businesses defy reality.”

According to the statement, Google Australia generates AU$10m in revenue from news-related searches. The firm did not provide insights on the indirect value generated from news across its advertising platform.

In other words, Google believes the Code unfairly disadvantages it against traditional media businesses.

The ACCC has published a response seeking to address “misinformation about the draft news media bargaining code”. The statement reaffirms that the Code is intended to “address a significant bargaining power imbalance between Australian news media businesses and Google and Facebook.”

This is a fight that matters: regulators and platform giants alike will observe this evolving battle with interest.

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