Treasurer Josh Frydenberg is this week due to release the draft Australian Competition and Consumer Commission report on Google and Facebook’s control of the $10 billion digital advertising market.
The report, coming in the wake of last week’s threats by Google to walk away from the Australian search market, is important because it takes regulatory scrutiny forward from the essentially backward-looking cases so far.
Last week’s Senate hearings were into the federal government’s proposed media bargaining code, but the ad tech inquiry is aimed at exposing the largely opaque market dominated by Google and Facebook.
The Google threats underlined the concern that consumers are being held to ransom.
That in turn is underlined by its control of the advertising technology market.
The ACCC called for the inquiry to “assist in increasing the transparency in the operation of the ad tech supply chain and the operation of advertising and media agencies, and in determining whether any competition or efficiency concerns exist”.
Google’s threat to withdraw from the search market simply confirmed its market power, because in a competitive market with low barriers of entry the withdrawal would simply open the way for competitors to take its market share.
Google pays rival Apple over $US8 billion a year to ensure its searches are top of the list on Apple operating systems for products like iPhones.
The payments, which account for around 17 per cent of Apple’s annual earnings, show just how important placement is to Google, which now has its own rival Android operating system.
The ACCC has argued “the concerns with the ad tech supply chain go beyond the operation of the auctions and the risk of self-preferencing and include concerns with a lack of transparency as to the effective price paid for each ad tech service”.
In its digital platforms report the ACCC said “the ad tech supply chain involves a range of advertising technology services offered by Google and other businesses to advertisers, websites and apps in order to match advertising demand and supply, and enable the instantaneous delivery of advertisements targeted at particular online users”.
“The opacity of the ad tech supply chain means that the sum of the prices charged by suppliers of ad tech services and the share of advertising expenditure they retain are unknown to many advertisers and websites,” it added.
The ACCC said “the potential harm caused by dominant firms to business users (principally advertisers) can extend beyond self-preferencing. Other areas where there is a risk of potentially anti-competitive conduct by digital platforms include restrictive clauses in customer contracts, preventing customers partnering with rival businesses and restrictions on access to data and the promotion of competing products.”
Search is important to Google because it reinforces its control of the data collection market and without it, rivals would have a competitive edge.
Bega’s battle
In 2001 Bega chair Barry Irvin renegotiated his deal with Fonterra after the latter acquired Bonlac. Post-dairy deregulation, it was a godsend.
It came with upfront cash and regular royalty payments in a licensing deal that gave Fonterra the right to use the Bega name for cheese in Australia.
The terms of that deal are awaiting a decision in the Victorian Supreme Court in a dispute between the two over Bega’s use of its name on peanut butter after the 2017 Mondelez deal.
Bega has the right to the name on cheese outside Australia, but not domestically, and it claims Fonterra has dropped the ball in marketing, slashing spending from $660,000 a year to $15,000.
The historic deal also shows the dramatic change at Bega, which was a small co-op concentrating on the wholesale market when deregulation hit at the turn of the century.
It has now changed from a business-to-business company to a business-to-consumer one with 80 per cent of revenues (up from 59 per cent pre-Lion) and 76 per cent of earnings (up from 64 per cent) derived from branded goods in the wake of the Lion deal.
This achieves Irvin’s stated goal of earning 80 per cent on branded goods by 2023 and in the process offsetting the vagaries of the international commodity market, which is outside his control. Whether shareholders will reap the benefits of the deal remains to be seen. The risks are clear when you consider last year Lion Dairy and Bega both had revenues around the $1.5bn mark, but Bega earned $103m against $56m at Lion.
This disparity may well be the opportunity ahead for Bega or simply the fact that Lion comes to the table with a bigger share of the drinking milk market, which has lousy margins.
Bega paid $534m plus $60m in so-called IT separation costs and $53m in acquisition costs, so the deal is not exactly cheap, and the pressure is on Irvin to more than deliver on the $41m in synergies claimed.
His stock is trading at $5.36 a share against the November capital raising at $4.60, so the market still has faith in the deal which closed yesterday.
It came with a strong cold storage distribution chain, strong market and flavoured milk brands, juices and yoghurt, which is a struggling category.
The job is now ahead of Irvin, who has completed his long-planned restructuring of the company he started chairing 21 years ago, and his hand-picked successor Paul van Heerwaarden.
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