The Australian Competition and Consumer Commission recently proposed a mandatory bargaining code to govern negotiations between digital platforms like Google and Facebook and publishers regarding payment for news content. Beyond its immediate application, could it also be an option in the experimentation underway for the design of future regulations of dominant digital platforms?
The Australian Competition and Consumer Commission (“ACCC”) recently proposed new legislation for a Mandatory Bargaining Code that would govern negotiations between giant ad-funded digital platforms—Google and Facebook—and publishers about payment for use of news content.
With discussions around this issue long mired in controversy around the globe, the ACCC introduced an obligation to reach a bargained solution for a payment in favor of publishers, specifying a particular type of “backstop” (“final offer arbitration”) should negotiations fail. Google and Facebook have argued that this will lead to lower service quality to Australian consumers and threatened to withdraw news content altogether. Reactions from some quarters have been very negative, saying that if governments want to support news, they should simply tax the platforms and subsidize news. Or indeed, just subsidize news from the public purse.
This misses the point: what is interesting about the Australian proposal is that it is a form of regulation, motivated by the recognition that there are major imbalances that need to be corrected in the relationship between platforms and publishers. Contingent on a desire to regulate, the ACCC’s approach is better than a tax because it empowers both sides to learn the value created by the relationship and shape an agreement, encouraged by an efficient arbitration backstop.
But can the ACCC’s approach have implications beyond compensating news publishers? Might it be a useful complement to the more traditional approach to regulation, with private negotiations replacing an agency setting “a number”? Can it have broader application to deal with other disparities in bargaining power between platforms and the businesses that operate on them? We argue that this form of “decentralized regulation” shows promise as an option in the design of future regulations addressing the dominance of digital platforms in many settings.
A “Mandatory Bargaining Code”: the ACCC’s Solution to Compensating Publishers
The quality of journalism is key to healthy political debate and a pillar of democracy. Quality journalism needs funding, yet publishers’ sites are a source of free “content” for Google and Facebook. While this has added to the consumer experience, it has also weakened the economics of publishing.
News outlets see themselves in a “pact with the devil”: on the one hand, they seek visibility on digital platforms due to their pervasiveness as a go-to source for information; on the other, to the extent that less traffic goes directly to publishers’ outlets, their ability to build relationships with readers and fund news production is undermined. Consumers may benefit in the short run by getting content “for free,” but the tradeoffs get complicated in the long run, with concerns about a reduction in publishers’ ability to produce quality news.
Antitrust agencies had little to say about this, but as the debate on the scope of antitrust enforcement has progressed, things have started to happen. Most notably, the ACCC was asked by the Australian government in April to “develop a mandatory code of conduct to address bargaining power imbalances between Australian news media businesses and digital platforms,” and issued its News Media and Digital Platforms Mandatory Bargaining Code on July 31st.
The ACCC code has made waves because it eschews the traditional process, in which an agency has to digest endless submissions from both sides and then come to “a number.” Instead, it essentially tells both sides: “Some compensation to publishers is due, but I won’t calculate what it should be—you can ask each other for data and information and find a solution yourselves. However, after a while, if you don’t come to a private settlement you will need to appoint an arbitrator panel and the rules of the arbitration will be the ‘final offer.’”
Meaning: after negotiations are exhausted, each side needs to make a single best and final offer, and the arbitrator can only choose one of the two. No further round of offers, no “cutting it in the middle”: one or the other. This is expected to do away with posturing over multiple rounds and encourage “reasonable” valuations to emerge on both sides.
What’s the idea?
The Australian draft bill mandates that digital platforms (for now, Google and Facebook) negotiate with Australian “news media businesses” over compensation payable to the latter for use of news content. Having determined that compensation is due, the draft bill requires the parties “to negotiate in good faith over all issues relevant to news on digital platform services.” News businesses can bargain either individually or collectively. The bill also covers non-price features (algorithmic changes, branding, and user data collected through interactions with news content). Both sides are also granted information gathering powers to allow them to gauge the respective benefits (direct and indirect) arising from the use of news.
We focus here only on rules for compensation. The idea of getting parties to bargain privately is not new (and indeed, it is part of the obligation issued by the French competition authority, the Adlc, as well). What is different about the ACCC’s proposal is the adoption of a compulsory “final offer arbitration” on payment if negotiations within a fairly tight deadline (three months) do not produce an agreement. The arbitrator must decide on one or the other offer within a month, the outcome is binding and the regulator (the ACCC) stays broadly out of the way.
Final-offer (or “baseball-style”) arbitration has been used in other settings, and we think it has potential, beyond the funding of news, for tackling bargaining imbalances with dominant digital platforms more generally.
Externalities, Value, and Uneven Bargaining Power
Why is intervention needed in this space at all?
First, while there is value in the relationship between publishers and platforms, the size of that value is disputed. For example, the platforms have claimed that they have not captured any of the decline in newspapers’ classified ads business because it has all gone instead to online alternatives like Craigslist or specialist vertical providers (e.g., for real estate or cars). But this is incorrect: for many local services (from plumbers to restaurants), consumers simply use search instead of classified ads—and Google directly benefits. Plus, Google is dominant throughout the ad tech stack, so any advertising or SEM done by vertical platforms also benefits them.
Furthermore, platforms derive value from news content which is not simply revenue from advertising sold on pages with news links. Google has claimed to be making trivial revenues from news-related queries in Australia, but draws indirect value: information about consumer preferences and interests can be inferred from knowing which newspapers someone follows (The Guardian or The Times?), as well as the specific articles they search for, link to, and ultimately read. Such data is likely to be a valuable complement to both Google and Facebook’s primary business of selling online advertising.
Furthermore, Google and Facebook seek to be a “one-stop-shop” for all consumers’ information needs. Because many consumers care about news, this implies that news provides increased data to foster their own online ad businesses, a greater ability to build a distinct platform or “ecosystem,” as well as to develop subscriber relationships with consumers. Each could have considerable value.
This is not to say we do not recognize that publishers also derive value from platforms’ distribution. They absolutely do, and it too should be quantified and negotiated over.
Second, there are enormous inequalities in market and bargaining power between publishers and platforms. News is competitive and platforms are not, so standard bargaining theory predicts that, even if all parties could agree on the size of the pie to be split, one side—the publishers—would get little or none of it. The ACCC has made the policy decision to address that imbalance and the way they’ve done it is the Bargaining Code.
Third, there are social externalities in the production of quality news: While we value the production of quality news as a society, their free availability on digital platforms reduces people’s willingness to pay for them. Platforms support content generation by giving it a level of visibility that would not otherwise be possible, but how do the content generators monetize? For publishers with a target audience with high “willingness to pay” that’s capable of distinguishing good content from bad, a subscription model may be viable. But we don’t want all of journalism to disappear behind a paywall. If the average voter is not willing to pay for news (as is likely), a situation in which the bulk of the electorate’s access to news is based on what platforms that monetize through advertising choose to show them would be a terrible outcome for public debate and democracy.
Finally, the proposed solution of some critics (direct taxation and financial transfer to publishers) is also likely to be a bad idea. We don’t think a regulator-defined “number” for a tax set on the basis of very incomplete information would lead to an efficient outcome. And academic research indicates that, in general, we don’t want the press to receive cheques from the government. This is an externality that has to be taken seriously: since the market is not working well, mandating platforms to give money to reputable news outlets seems better than the alternative.
Why the ACCC’s Solution Has Desirable Economic Properties
Once we recognize that there are other indirect sources of value created for platforms in their relationship with news publishers, and if we believe there are values like the quality of journalism that democratic societies may want to preserve, then one sees the rationale for intervention that mandates a payment from one side to the other.
Make no mistake, this is regulation. And given that it’s regulation, our view is that it is better to let the size of the payment be bargained between the two sides (with an arbitrator as backstop) than have a government (or its appointed regulator) set a potentially arbitrary (and inefficiently homogenous) “tax.”
Economists have studied bargaining for decades, with the principles underlying this literature seeking to capture the reality of business negotiations. The dominant paradigm for “non-cooperative” settings like negotiations between business partners, the Asymmetric Nash Bargaining framework, says that outcomes of a bilateral bargain depend on three factors: (1) the total profit to both parties from reaching an agreement, (2) each party’s “threat point” profit in the case of a disagreement, and (3) each party’s “(Nash) bargaining power,” written as a percentage between 0 and 100 (with the sum of the bargaining powers equal to 100 percent). The total profit from (1) less the profit from each party’s threat point in (2) defines the possible “gains from trade,” a.k.a. the size of the “pie to be split,” and the bargaining power in (3) defines how much each party gets of this pie.
Several elements of the ACCC’s proposed bargaining code can be understood naturally within this framework. The first is the granting of information-gathering powers to both platforms and publishers. If both sides need to show their workings, they need information to form a view on their respective value to each other, as well as their respective threat points. Each has to learn the other’s (and their own!) threat point profit, also fostered by the ability to gather relevant information (e.g., how much does Google or Facebook profit from online advertising when they don’t have information on consumers’ news consumption; how many Australian users would go directly to publishers’ websites if Google or Facebook no longer offered news content?).
The second is granting news publishers the ability (if they so choose) to bargain collectively in the new system, as well as the non-discrimination requirement that would prevent them from favoring non-Australian news content relative to Australian news content. Collective bargaining allows (especially smaller) publishers to get together and achieve economies of scale in negotiation to improve outcomes relative to their negotiating individually.
Nondiscrimination is important because Google would have a stronger threat position if it could substitute international news content for Australian news in the absence of an agreement with all Australian publishers. It can also be beneficial in circumstances where individual negotiations would lead to “divide and conquer” strategies. With collective bargaining (if chosen) and a non-discrimination rule, Google would have to consider not being able to link to any news, Australian or otherwise. If such links have value, this will lower Google’s threat point, improving outcomes for Australian news publishers as a whole.
Third, the use of “final offer” (“baseball-style”) arbitration as a backstop means that submitting final offers to an arbitrator, each party has an incentive to present an offer relatively close to that which they consider a likely outcome of the voluntary agreement (as evaluated by the arbitration panel), for fear that if they present something outlandish that favors themselves too much, the panel will simply choose the other proposal. This advantage has long been recognized in the literature, both by fostering final offers that are close to each other relative to what might arise in bargaining outcomes backstopped by other arbitration rules, as well as producing agreements that don’t require the use of arbitration at all.
Moreover, this backstop can also mean that collective bargaining is not the only way to protect publishers from uneven power. Should they choose to bargain individually, the fact that there is an “arbitration shadow” to the negotiations means they can make the case to the arbitrator that they should not be offered just the incremental value to Google of their content. Arbitration can mitigate the “divide and conquer” problem.
The final advantage of the proposed method: it ultimately gets the parties to do the hard work of quantifying the key inputs into the value of news, not a regulator. This goes towards addressing a key asymmetry of information problem that plagues the economics of regulation generally: digital platforms and news publishers are far more likely to know the value of news content to digital platforms and the value of distribution to news publishers than any regulator could.
Indeed, it is this insight—that mandatory bargaining, supported by a final-offer arbitration backstop, can out-perform a regulator—that inspires the main takeaway from our article.
Could the ACCC’s “Bargaining code” Be a Model for “Decentralized Regulation”?
Concern about exploitation and expropriation of value by digital platforms is pervasive. Frustration with the pace of antitrust enforcement has brought forward a wave of regulatory initiatives in Europe, from the UK’s CMA to the EU’s DG Connect, gearing up for a major push in the fall.
Which begs the question: Do we have enough ideas for how to design regulations for digital platforms? Regulatory economics as a discipline has declined and it is no longer an active field of study among academics. Some have spoken about applying “the principles of utility regulation,” but this would likely be a mistake in markets with features very distinct from old-fashioned platforms.
Could regulators worldwide borrow a leaf from the ACCC? Could it at least be a complementary approach that cuts through the difficulties of designing the right rules and getting a regulator up to speed in a world of asymmetric information and potential regulatory capture?
Much of the current debate on platforms is the question of “rent extraction” by a “gatekeeper” that unilaterally (and uniformly) sets the rules of engagement for businesses reliant on it for distribution and visibility. While antitrust agencies are reluctant to intervene as direct price setters, incoming regulations will undoubtedly be willing to mandate something equivalent to price-setting rules. Various “solutions” will be discussed in the coming months, perhaps involving mandated access pricing and tiered fee schedules without a clear basis.
The question is: why could there not be also a “fair” payment based around private bargaining, underpinned by a baseball-arbitration backstop? As outlined, this would have the benefit of allowing the parties to leverage their private information and come to a private agreement on terms that suit them both. We think of it as “Decentralized Regulation.”
There are of course practical considerations. The ACCC’s bargaining code focuses on news publishers, where individual bargaining is conceivable. How feasible would it be to mandate platforms to bargain with potentially thousands of counterparties across many industries? Negotiating with counterparties is time-consuming and requires some effort. On the other hand, “negotiating” is what companies do. Why should it not have some attraction here, especially if limited to larger counterparties?
These problems must be solved in any regulatory design. And it further highlights how regulating digital platforms will necessarily be different from traditional utility regulation: We already worry that a regulator cannot understand the economics of a single industry as well as the firms it is mandated to regulate—the problem is multiplied in the case of digital platforms.
What would platforms make of such an approach? Google and Facebook are threatening to cease carrying news in Australia. If the platforms were to think only about their Australia businesses, we think that is unlikely: bargaining theory says that a deal will be made whenever there are gains from trade (and there clearly are here, albeit with some risk if a disagreement goes to an arbitrator). Alternatively, they may well take the view that it’s worthwhile to create a reputation for toughness in Australia than face the issue in multiple settings around the world. If that’s the case, though, it does not follow the experiment would be a failure. Consumers could still get news, just not as easily as before, and it would be an opportunity for publishers to build stronger customer relationships.
Even if it completely fails and publishers agree to terms only slightly better than what they get now, this too would just be a cost of experimentation. The societal problem of adequately funding news production wouldn’t go away; legislators and regulators would then need to try again.
As for other platforms and other markets, if the threat of regulation is serious and close enough, some may anticipate that voluntary change may be better in some cases than a mandated solution imposed by a relatively ill-informed regulator. Alternatively, a regulator could itself include a mandatory bargaining code, with a backstop, as one aspect of a menu of approaches. There seems to be no reason why bargaining backed up by arbitration could not be mapped into these discussions.
One thing is clear: change is coming to the way in which large digital platforms are going to manage the relationship with third parties that are subject to their rules. “Decentralized Regulation,” inspired by the ACCC’s mandatory bargaining code, can be one part of the set of possible solutions.
Editor’s note: follow the rest of our coverage of the dispute between Google, Facebook, and the ACCC here.
The views expressed in this article are the authors’ only. We have not received any compensation for this piece nor have we advised any parties in either the Australian investigation or the current consultation. Cristina Caffarra used to advise NewsCorp but no longer does, and has consulted recently for Amazon, Apple, and multiple others. Gregory Crawford has consulted recently for Apple. Neither has consulted on matters related to those discussed in this article.