The EU is pursuing a range of legislative initiatives that aim to make Europe fit for the digital age. Stakeholders in the digital advertising sector should consider the aggregate impact of these regulatory changes and stay ahead of the curve in order to manage potential risks and seize new opportunities.
A century has passed since marketing pioneer John Wanamaker coined the phrase: “half of the money I spend on advertising is wasted; the trouble is I don’t know which half.” Back then however, marketers did not possess the technological means to gain deep insight into market trends, consumer preferences and profiles, nor to acquire the precise measurements needed to optimise returns on individual advertising campaigns. It is only during the last decade that stores of consumer data and AI-powered “ad tech” have emerged as the solution to Wanamaker’s dilemma.
Today, digital advertising is both a large and growing business. Despite the economic downturn caused by the Covid-19 pandemic, spending in digital advertising has nearly matched pre-pandemic forecasts for 2020, with a stunning year-over-year growth of 12.7% worldwide. Globally, digital advertising is predicted to reach $455 billion in 2021, thus capturing 60% of the total advertising market worth of $747 billion. Much of the growth stems from the increased use of mobile devices, the upswing of new formats (video) and communication channels (social media, in-game), as well as the rise of augmented and virtual reality technologies (VR/AR).
Yet this bright outlook has recently been clouded by three sets of issues. The first one is connected to what is sometimes labelled as ‘commercial surveillance’ or ‘ad tech stalking,’ which relates to the risks to privacy and democracy posed by the predominant advertising model (based on user behavioural profiling). The second one concerns the risk of market power abuse by so-called “gatekeeper” platforms, which has prompted some jurisdictions in the EU and beyond to enforce competition rules, or envisage sector-specific regulations to ensure a fairer playing field for digital services (including advertising). The third one stems from the perceived failure of major online platforms to assume an appropriate level of responsibility, and from the need to promote a safer and trusted digital environment for users, advertisers and publishers alike.
Against this backdrop, the EU is now pursuing a range of policies and legislative initiatives in the attempt to address these concerns, entailing new challenges but also opportunities for all stakeholders in the advertising supply chain.
Last February, the Portuguese Presidency brokered a compromise on the draft ePrivacy Regulation, after a 4-year stalemate in the Council. Trilogue negotiations between the European Parliament, the Council, and the Commission have now started in a bid to reach a consensus. A fine balance will need to be found in order to restore consumer trust and security, while ensuring operational solutions so that brands can continue to target their ads, and enabling publishers to maintain the value of their advertising inventories. In theory, this evolution could mean wider recourse to ‘walled garden’ and therefore, to a strengthening of the kind of vertically integrated advertising services typically offered by large online platforms. But it might also pave the way towards more drastic innovations such as open standards (based for instance, on Universal IDs) that in turn may contribute to market rebalancing for display advertising.
Of equal importance are the Commission’s proposals from December 2020, aimed at providing a modernised framework for the digital economy. The Digital Services Act (DSA) and the Digital Markets Act (DMA) have just entered the co-decision phase in both the Council and the Parliament, expected to occupy the next two to three years.
The DSA’s goal is to deliver a safer and trusted online space for all users of digital services, and this will affect all actors in the digital advertising ecosystem to varying degrees. Existing rules in the field of consumer protection and misleading advertising have proven insufficient in ensuring user safety and trust in the online environment. During the first wave of the pandemic for example, many European markets were overwhelmed with scams, counterfeit or dangerous products, that were heavily promoted via online platforms as remedies to the Covid-19 disease. In a Communication in June 2020, the Commission observed that efforts made by large online platforms to tackle the problem were too slow and too limited. The aim of the DSA is to plug these gaps and ensure that exemption from liability under the eCommerce Directive that has profited platforms for over 20 years, can no longer be used as a shelter from responsibility in limiting the spread of illegal and harmful content on their services. Providers of online advertising services both large and small therefore, will have to ensure transparency, prevent the monetisation of illegal or harmful content, and implement measures to strengthen the integrity of their services against illegal advertisements and fraudulent activities. For very large online platforms, the new rules will set out additional obligations that are commensurate with their economic role and social responsibility. Self-regulation, namely in the form of Codes of Conduct may become mandatory and subject to independent audits.
As regards the DMA, its aim is to ensure that advertising markets remain contestable and to support the ability of weaker players to compete against tech giants. Several ex-ante requirements on ‘gatekeeper’ platforms are expected to create new business opportunities for companies operating within the advertising supply chain. Advertisers for instance, could gain access to certain categories of data held by gatekeepers, helping them to improve their ad spending and consumer insights. Publishers could be sheltered from unfair self-preferencing practices by platforms, playing a dual role as providers of intermediary services for third-party websites and vendors of advertising space on their own online interfaces. Also, technology firms could develop new pathways that connect advertisers to publishers through innovative partnerships, outside of walled gardens. Nevertheless, many questions at the frontier between market regulation and competition are expected to arise, and the legislative debate will have to break new ground where different interests may prove difficult to reconcile.
Importantly, some of the emerging challenges for digital advertising cut across different legislative files. Issues around the use of behavioural profiling for targeted ads for example, are addressed under the proposals for ePrivacy, but they will also re-emerge in the discussions on the DSA and DMA. Moreover, they will be further examined under a new legislative proposal on political advertising expected in Q3 2021. Issues regarding market contestability are linked to the DMA, but they will also arise in the context of competition enforcement cases. Providing further complexity still, such interlinkages will branch out to a number of the Commission’s other initiatives, notably in the area of AI and data governance.
In such an evolving regulatory environment, the stakes are too high for the advertising industry to simply sit back and wait. Rather, we see an opportunity for the industry to take a proactive stand and consider four strands for possible action.
Firstly, while the basic tenets and underlining objectives of the Commission’s proposals seem to be widely shared across the EU’s institutions, the upcoming legislative debate may lead to important changes in the draft proposals. It is therefore important for stakeholders to carefully evaluate potential regulatory risks and consider ‘anticipatory compliance’ measures that may alleviate policymakers’ concerns. In particular, they could consider setting up risk assessment and compliance programmes, and engage in self-regulatory processes to minimise legal risks and build trust with public authorities. It is noteworthy that ahead of the DSA adoption, in its Communication of 26 May the Commission invited stakeholders to step up their efforts in self-regulation, including scrutiny of ad placements.
Secondly, the reform package will inevitably boost the importance of industry-wide standardisation, from the use of cryptography to mitigate fraud, to the definition of ID solutions to protect privacy while at the same time ensuring addressable ads and maintaining the value of publishers’ ad inventories. By influencing such standardisation efforts through a clear vision of the possible competitive outcomes, proactive stakeholders would be in a better position to drive the change and gain leadership.
Thirdly, in order for publishers to keep a competitive edge and for advertisers to avoid excessive dependency on gatekeepers’ advertising services, innovation in ad tech stack is of the essence. The implementation of new marketing techniques, improved collection of customer data through first-party cookies, and the creation of independent media data spaces may be key in safeguarding a competitive advertising ecosystem, for the benefit of publishers, advertisers, tech providers, and ultimately consumers too. This will require innovative and antitrust-compliant partnerships to increase efficiency in ad tech stack, and enhance strategic autonomy for both buyers and sellers of digital ad inventories.
Finally, stakeholders should reconsider their strategic communication in synchronisation with the key objectives of the reform process. Given the current climate of generalised distrust and fears of personal data misuse, positive messaging around the adoption of responsible media strategies should be an essential component of an overall communication strategy to strengthen corporate image and brand reputation.