Government and Institutions

The case for private, market-based regulation of the internet

The rise of the internet is a huge competitive challenge to more traditional media, notably print newspapers and TV. But it also raises some important policy issues, including the extent to which government intervention can – or should – create a level playing field.

To start with an obvious question, what’s wrong with more competition? For example, advertising has been migrating away from print and towards online platforms for many years. As a result, digital ad spending in 2016 exceeded £10bn in the UK alone. That might be bad news for newspapers and good news for, say, Facebook and Twitter. However, at first sight it isn’t a problem for the rest of us. Advertising is simply following consumers as they switch from one technology to another.

More generally, there could be a useful analogy with the emergence of innovative companies like Uber and other online platforms which can offer taxi services more efficiently and at a lower cost than established providers. Consumers have typically benefited from shorter waiting times, cheaper fares, and higher quality – despite the protests of the incumbents.

Nonetheless, there are some potentially valid concerns. In general, what happens online is subject to much lighter regulation than the activities of traditional media. This was raised by many newspaper editors in evidence to the Leveson inquiry. Or as the Daily Mail recently put it, rather more robustly, “how much longer can the arrogant, filth-spreading, fake news mongering, tax-dodging, small firm-destroying, terror-abetting internet giants remain above the law?’’.

To be fair to the tech industry, the internet is not a regulation-free zone. An OECD survey has identified “various industry standards, co-regulatory agreements between industry and the government, and in some cases also state regulation. Most of them aim at protecting personal data and consumers more generally. In many cases generally applicable laws and regulations exist that address privacy, security and consumer protection issues both in the traditional and the digital economy’’.

In the UK, for example, online advertising is subject, at least in principle, to the same self-regulation as traditional media. The rules of the Advertising Standards Authority (ASA) apply equally to websites and social media as they do to newspapers and billboards. What’s more, the Independent Press Standards Organisation (IPSO) already regulates 1,100 online titles, in addition to over 1,500 print newspapers and magazines. And the courts have long been able to require internet service providers to prevent access to rogue websites for a wide range of reasons, from blocking child pornography to copyright protection.

The question then is whether these existing controls are sufficient. The issue of the availability of extremist material useful to terrorists is particularly topical. The current government has pledged to continue to push the internet companies to deliver on their commitments to develop technical tools to identify and remove terrorist propaganda and to counter ‘fake news’. (See chapter 5 of the Conservative Manifesto for the 2017 General Election.)

Some commentators have gone further and argued that a new regulator needs to be established to ensure that internet users are protected from harmful material online and to hold tech companies accountable for the content published on their platforms, in the same way as other publishing outlets. This may be a step too far. Rather than merely restoring a level playing field, state-led regulation of the internet would risk tilting it in favour of traditional media, which are largely self-regulated.

An alternative solution is to encourage private regulation by the market. This might seem naive, but it is already happening. Advertisers, including Procter & Gamble, Unilever and Vodafone, have been applying pressure on platforms such as Facebook and Google to put their own house in order. In some cases, they have voted with their feet and cut budgets; in others, they have provided advertising agencies with ‘whitelists’ of sites where they are happy for their brands to be featured.

In part, this reflects their desire not to be associated with harmful material that damages their own reputation. But there are also increasing doubts about the effectiveness of online marketing. Online advertising outlets often claim to be able to target particular consumers with surgical precision, or at least much more efficiently than a print ad. In practice, it is hard to monitor who actually reads an online ad. Indeed, it has been suggested that “half of online ads are viewed by networks of hacked devices programmed to generate fake clicks”.

Giving the market the leading role in sorting out these problems may be more realistic than shifting the onus onto government. As the OECD study also noted, “the task of regulating the internet is further complicated by the multitude of players, activities and media involved as well as by the rapid shifting of the economic and technological landscape and the virtual absence of geographical boundaries.” Indeed, clumsy regulation could simply hold back innovation, for example by imposing a disproportionate compliance burden on start-ups, while being easy for less scrupulous players to evade.

Nonetheless, the newspaper editors still have a good point (or several). For self-regulation via brand reputation to work effectively, internet companies need to be under constant scrutiny. Traditional media outlets may well be performing a useful role in exposing bad behaviour and thus helping other interested parties, including consumers and advertisers, to make informed decisions.

What’s more, the ability of multinational companies, including tech giants, to minimise tax bills by artificially booking profits in low tax jurisdictions does have wider implications. This merits a separate blog. Suffice it to note that the latest EU-led proposals to levy a tax on revenues as well as profits are probably not the answer, but the issues here are worth considering further.

Overall, though, competition and market forces can go a long way towards ensuring a level playing field. Just as companies like Uber have an economic self-interest in protecting and enhancing the reputation of their brand, so the tech giants will have to work harder to improve their business models. In contrast, state intervention in such a dynamic sector is only ever likely to be playing catch up.


Julian Jessop is an independent economist with over thirty years of experience gained in the public sector, City and consultancy, including senior positions at HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. He was Chief Economist and Head of the Brexit Unit at the IEA until December 2018 and continues to support our work, especially schools outreach, on a pro bono basis.

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