The Digital Market Competition Council (the “Council”) published the “Interim Report on the Evaluation of Competition in the Digital Advertising Market” (the “Report”) on June 16, 2020.1 The Council is seeking comments from the public. Comments are due by July 27, 2020.2
In Japan, the Cabinet established the Headquarters for Digital Market Competition (the “Headquarters”) on September 27, 2019, in order to implement policies to promote competition and innovation in the digital market in a timely and effective manner.3 The Headquarters hosted the Digital Market Competition Council and Digital Market Competition Working Group in order to study and deliberate important matters concerning the digital market.
On June 16, 2020, the Council published the Report and seeks comments from the public until July 27, 2020.4 The Report provides an overview of the digital advertising market and summarizes issues and proposed measures, taking into account efforts in foreign countries.
The digital advertising market has been expanding rapidly. In 2019, digital advertising expenditures totaled approximately JPY 2.1 trillion (approximately USD 19 billion), which, for the first time, exceeded TV media advertising expenditures (approximately JPY 1.9 trillion/USD 17 billion) and accounted for approximately 30 percent of all advertising expenditures in Japan (approximately JPY 6.9 trillion/USD 64 billion). Programmatic advertising, in which ad space is traded in real time, accounts for about 80 percent of total digital advertising.
The digital advertising market comprises publishers, advertisers, digital platforms and advertising technology companies. Publishers sell advertising space on their own websites and/or applications. Advertisers purchase advertising space and place advertisements. Digital platforms and advertising technology companies mediate those stakeholders.
In principle, the Report recognizes that digital advertising provides benefits. For example, digital advertising creates opportunities for a variety of businesses, including small- and medium-sized companies, to reach out to customers they could not reach otherwise. Consumers also benefit from digital advertising. They are able to use various services on the Internet for free because of revenues from digital advertising.
However, at the same time, the Report indicates that the digital advertising market has some issues. In recent years, it is said that oligopoly has been progressing in the digital advertising market globally by vertical mergers. Accordingly, concerns about transparency and fairness in the digital advertising market, as well as anti-competitive conduct in the digital advertising market, have been raised. In addition, there are concerns about the collection of personal data used for profiling consumers’ attributes and preferences.
Here are the major characteristics and issues in the digital advertising market indicated in the Report.
The digital advertising market is complex and changing rapidly; therefore, it is difficult for stakeholders, including consumers, advertisers and publishers, to understand the reality of the market, especially when bidding in real time occurs with “black box” algorithms to match supply and demand.
The digital advertising market has been moving toward oligopoly through network effects. The strength of a digital platform’s own media is leveraged, which leads the advertisers’ coverage to expand, and the strength of the advertisers’ coverage also is leading to the acquisition of publishers in the Open Display Market.
Recently, privacy awareness is increasing and companies tend to restrict sharing user data with other companies. As a result, data tends to be centralized to certain digital platforms and that puts the digital platforms in an advantageous position. This will accelerate the trend of oligopoly.
Many users think they have no choice but to use certain digital platforms. These digital platforms are becoming increasingly influential in the design and operation of the digital advertising market.
Quality of Digital Advertising
The digital advertising market has issues with the quality of services. For example, approximately 70 percent of consumers find targeted advertisements annoying. “Ad fraud” is one of the most serious issues for advertisers. In addition, advertisers are faced with the risk of damaging their brand as a result of costly advertisements without sufficient control over the content of advertisements. Publishers may find it difficult to link the value of their costly content to the selling value of their advertising inventory, and if this situation continues, the business infrastructure of the media will be undermined. Consumers, who provide data which is used for targeted advertising, have great concerns about how their personal data is treated.
The digital advertising market has been and will be changing rapidly. The business model in the digital advertising market would change significantly over the next 18 months if measures are taken for privacy issues.
Further, the Report lists up to ten types of issues from five perspectives, including transparency, data utilization, vertical mergers, procedural fairness and consumers’ issues. The issues from a transparency perspective include: (i) the quality of digital marketing, (ii) the opacity of transactions (e.g., the value of a publisher’s content is difficult to evaluate), and (iii) the measurement of achievement indicators by third parties. The issues with respect to data utilization include: (iv) problems caused by data digital platforms obtain by using overwhelming power, such as customer contacts, attention and network effects. The issues from the vertical merger’s perspective include: (v) conflict issues triggered by vertical mergers, (vi) favorable treatment for group companies in the bidding process, and (vii) the restriction of vertically integrated companies to distribute only via advertising technology services provided by the digital platforms with which they are integrated. From the procedural fairness perspective, there are two issues, including: (viii) a change of the system and rules by digital platforms, and (ix) search engine parameters. Lastly, (x) there are consumer concerns with respect to the collection and use of personal data. The Report also proposes measures for each issue.
The Council continues to collect information, by interviewing relevant businesses and experts and communicating with foreign authorities, and will publish a final report this winter.
The Report (92 page long) in Japanese is available at https://search.e-gov.go.jp/servlet/PcmFileDownload?seqNo=0000203279.
The four-page summary in English is available at https://www.kantei.go.jp/jp/singi/digitalmarket/pdf_e/documents_200616-1.pdf.
As mentioned above, the Council seeks public comments. Comments are due by July 27, 2020.
1 The Report (92 pages long) is available in Japanese at https://search.e-gov.go.jp/servlet/PcmFileDownload?seqNo=0000203279. The summary in English (four pages long) is available at https://www.kantei.go.jp/jp/singi/digitalmarket/pdf_e/documents_200616-1.pdf.
2 Details for the public comment opportunity is available in Japanese at https://search.e-gov.go.jp/servlet/Public?CLASSNAME=PCMMSTDETAIL&id=060200617&Mode=0.
3 The website of the Headquarters in English is available at https://www.kantei.go.jp/jp/singi/digitalmarket/index_e.html.
4 On the same day, the Council also published “Report on the Medium-Term Vision on Competition in the Digital Market.” Please see our Client Alert at https://www.whitecase.com/publications/alert/report-medium-term-vision-competition-digital-market-government-japan.