Competition, efficiency, and regulation in the Ad-Tech industry, Marketing & Advertising News, ET BrandEquity

  Picture used for representational purpose/iStock
Picture used for representational purpose/iStock

The rise of the advertising technology (ad-tech) industry is arguably a watershed moment in advertising. Ad-tech offers unparalleled benefits to advertisers and consumers by algorithmically targeting advertisements based on individual behaviors and preferences.

Notwithstanding these potential benefits, the fast-changing pace of this industry has led to potential anti-competitive conduct. These have paved the way for revolutionary reforms, including the recent Digital Service Act and Digital Markets Act that were passed in the European Union.

To a large extent, the anti-competitive conduct in the ad-tech industry arises from the complexity in its supply chain, coupled with a “winner takes it all” motive of certain players who use vertical and horizontal integration. Various firms in the industry are, for instance, vertically integrated ad-tech providers and offer related consumer-facing services. They can engage in foreclosure strategies or horizontal collusion, inflicting harm on competition.

Further, the growing use of “attention markets” in the digital economy reflects the falsified ideology that the advertisers are the customers, and users’ attention is the product sold to advertisers. This can potentially harm consumers as their thoughts are targeted using algorithmic tools. Through attention-focussed parameters, these thoughts can be modified for the successful conversion of viewers to customers.

This algorithmic approach translates into an information asymmetry between advertisers, publishers, and consumers, where consumers are unaware of the extent to which their personal data is being used to manipulate their decisions, choices, and perceptions. The accumulation of such data by firms in this industry also creates significant entry barriers, allowing big tech firms to exploit their first-mover advantage as they acquire stakeholders and create 360-degree consumer technology.

New entrants may find it challenging to compete with assets such as an established user base, especially if there are barriers including the lack of data and user interoperability and data portability. These are harms generated by network effects, which occur when demand for a product or service is influenced by the number of other consumers using the product or service. Such harms are further enhanced by the multi-sided nature of digital markets.

Despite such malpractices in the industry, the apparent efficiency generated when consumers’ interests are aligned with the content that they view through advertisements cannot be disregarded. Integration of services also introduces cost savings through higher scale economies and technological benefits such as reduced latency.

Against the above discussion, it is established that there is no encompassing standardization of such practices as efficiency-driven or anti-competitive in the digital advertising zone. In the subsequent paragraphs, we provide potential solutions to address the debate on how anti-competitive conduct can be identified and balanced against efficiencies.

Opening dialogue with regulators: Businesses should take proactive measures to demystify their business operations and help regulators understand the existing black box. It is challenging for regulators to regulate a market that changes its nature with every advancement. Transparency in the dialogue between both entities will create a channel of positive exchange and instigate a movement towards ex-ante regulation.

Lightly regulating the industry: Second, we believe regulators should not introduce stringent interventions governing ad-tech, until innovation in the industry reaches a certain scale. The industry should therefore be regulated through light-touch regulations with thresholds as traditional approaches might not be strategic. These thresholds, based on factors such as the size of the consumer base and the deal size of the acquisition, can determine if regulation may be required to address potential market distortion. Under this regulatory architecture, the enforcement agency would have an “educational” rather than a prosecuting role, except where there is evidence of a persistent offence.

Introducing a level playing field by monetizing non-personal data: To create a level-playing field for companies operating in the industry, many regulators recommend using data sharing frameworks, such as closed content aggregator framework and open data network, where aggregated and anonymised personal data can be traded as non-personal data. Companies that own or have this data can sell it to advertisers for a market-defined fee. Such a framework might facilitate the entry of new service providers’ and increase competition in the ecosystem.

However, we believe that this recommendation might amplify existing barriers to entry into practice. We understand that while many incumbent firms possessing large volumes of data are already monetizing non-personal consumer data, access to such data is restricted within heavily regulated environments. Advertisers cannot export the data from these environments to prevent data leaks. With advertisers being dependent on such databases to understand their consumers better, stringent restrictions can further augment barriers to entry.

Determinants of the future of regulatory architecture: The advent of cookie depreciation is widely discussed as it serves as the basis for targeted advertisements. A future without cookies, with means such as Unified ID 2.0 as rising alternatives, will substantially reshape the makings of the value chain.

The shift is likely to bring back control into the hand of the consumers through industry-wide changes such as third-party cookie removal, identity depreciation, and a consent-based ecosystem. There is an amplified focus on studying consumer behavior from a psychological point of view.

Advertisers depend on consumer behavior being inherently irrational and use consumer’s psyche against them rather than for them. Towards this end, certain cognitive frameworks can be designed to assist consumers with better decision making, using the principle of behavioral sciences that target the audience instead of the platforms.

To summarize, the purpose of regulatory intervention is to ensure higher efficiency in the market but not at the cost of stakeholders, such as the consumers. This, combined with the crux of competition law, where the motive of competition law is to protect the competition, not the competitor, allows one to rethink the balancing act of competition, efficiency, and regulation in the ad-tech industry.

-Bansal is partner – financial advisory and Jain is director – forensic, financial advisory, Deloitte India. The article also includes inputs from Priyanshi Desai and Mahima Soni, senior executives- forensic, financial advisory, Deloitte India. Views expressed are personal.

Nearly 48% of the 5,532 ASCI ads processed were digital ones, the report said. With its influencer guidelines coming into force last year, complaints against influencers comprised 29% of all grievances.

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