Will the regulator approve Taboola-Outbrain merger?

Taboola and Outbrain management  / Photo: Noam Galai

There are very real grounds for the Israel Competition Authority to nix the merger of the content recommendation companies.

The merger announced last Thursday by content recommendation companies Taboola and Outbrain came as no surprise to leading figures in the digital advertising industry, who saw it as a necessary measure. Beyond the underlying economic logic of the measure, however, questions have also arisen concerning its effect on the revenue of content websites in Israel, which currently benefit from the intense competition between the two rivals.

A natural question is whether the merger in Israel requires approval by the Israel Competition Authority, and if so, will a regulatory obstacle arise.

The Restrictive Trade Practices Law addresses a merger of companies for which one of the following conditions hold: if the merged companies becomes a monopoly, if the combined sales turnover of the merged company is greater than NIS 360 million, and if one of the merging companies is a monopoly in its field.

In this specific case, the two companies conduct most of their activity overseas, but the law also applies to companies with offices in Israel whose activity affects the local market. The Israel Competition Authority director general therefore ostensibly has grounds for taking a position.

Content recommendations: Advertising tool or independent market?

As far as the necessary sales volume is concerned, it appears that in Israel, the aggregate sales turnover of Taboola and Outbrain are far from the threshold established in the law. Senior market sources estimate the companies' sales turnover at NIS 100 million, and even if this is an underestimate, the true sales volume is far short of the threshold.

The reason that the deal may be sent to the Israel Competition Authority for examination, however, is the issue of a monopoly. The merger creates a situation in which instead of two competing companies making content recommendations, there will be only one, which is liable to detract from competition in the market.

In order to judge whether a merger damages competition, it is necessary to define the market in which the competition is supposed to take place and the share of the companies in it. Is the market content recommendations or digital advertising? If the market is content recommendations, then the merger creates a monopoly. Google and Facebook also have tools similar to those offered by Taboola and Outbrain, but in Israel, Taboola and Outbrain account for most of this type of advertising.

But content recommendations are an advertising tool, not an independent market. They are one tool in a collection of digital tools at the advertiser's disposal. Calling content recommendations a market in its own right is like saying that billboards are a separate market from the signs market, or declaring that the Daka Leshmoneh advertising band is a separate market from television advertising.

Since Taboola and Outbrain's aggregate annual activity amounts to NIS 100 million and the annual volume of digital advertising in Israel is NIS 1.1 billion, content recommendations accounts for at most 10% of the market.

Even if the sector prospers following the merger, it is hard to envision its share of the general advertising pie growing dramatically. If the market is defined as the digital advertising market, the merger's effect on the advertisers will be minor.

Significant damage? It depends on which website

The activity of Taboola and Outbrain, however, has an effect on the media side, where the merger's influence is liable to be greater. Taboola and Outbrain create advertising content (written or video), place it on websites, expose it to surfers according to their personal fields of interest using algorithms, and share the revenue with the websites. Payment is per click, but the competition between Taboola and Outbrain has led the two companies to make large payments to websites for the advertising space, regardless of the number of clicks. The websites, which in any case are facing an existential threat and erosion of revenue, were glad to get the extra money. The merger, which removes the element of competition between the two companies, is liable to detract from their generosity towards the websites, whose revenue will suffer as a result.

Is this damage significant? It depends on the website. Market sources believe that contracts with Taboola and Outbrain account for 8-15% of the large websites' revenue. Taboola, which currently works with 70% of the Israeli websites, offer more lucrative contracts than Outbrain, and its share of the total revenue of the websites working with it is therefore higher. Large websites such as Ynet, Walla!, and Mako, however, have additional sources of advertising revenue, due among other things to the content and traffic that they create. These websites will therefore be less affected by the merger.

In contrast, for small and medium-sized websites, the proportion of revenue from advertising of Taboola or Outbrain is higher - 20-25%. The creation of a single strong concern in the content recommendations sphere is not to their benefit, and will make it difficult for them to maximize revenue from this type of advertising. Does this damage competition? Not really, because these websites also have the option of offering new independent advertising tools or using Google, Facebook, Artimedia, or other concerns.

Is the Artimedia case indicative of the Competition Authority's attitude?

The Competition Authority has yet to comment on the merger at this stage, but its mood can be discerned through similar media issues it has dealt with in recent years - for example, the requests for an exemption from the ban on an agreement in restraint of trade submitted by Artimedia and the change in the Competition Authority's attitude towards them.

After accomplishing the impossible by getting all of the websites in Israel to agree to combine in one network, Artimedia submitted a request for an exemption from the ban on an agreement in restraint of trade to the Competition Authority. The main argument was that its activity should be viewed as part of the entire digital media market, in which giants like Google and Facebook have substantially larger inventories of video advertising than that of Artimedia. The Competition Authority did not accept this argument, defining the market in question as the "video advertising market in Israel." Although Artimedia became the marketer of almost the entire video advertising inventory of Israeli content, however, the Competition Authority allowed the measure to go through, ruling that the importance that Artimedia brought to the local market was greater than the damage that it was liable to cause to competition.

When the exemption expired after three years, Artimedia asked the Competition Authority to renew it. This came after it was learned that Google had entered the market in which Artimedia operates (Israeli video content), among other things through an agreement with Ynet. At this stage, the tone of the Competition Authority director general's offices changed. Artimedia was told that it needed no exemption; as in the rest of the world, the trend now is to switch to self-regulation of the organizations.

By this method, the companies are supposed to operate according to the legal opinions, and the Competition Authority intervenes only if it thinks that the law has been broken. It was further made clear to Artimedia that the concept of the market had changed, and the Competition Authority no longer believed that the Israeli video market should be regarded as a separate market; it should counted as part of the entire media market. If the video market is part of the media market, there is no reason why the Competition Authority should think differently about the content recommendations market, which is much smaller than the video market.

Published by Globes, Israel business news - en.globes.co.il - on October 6, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Taboola and Outbrain management  / Photo: Noam Galai
Taboola and Outbrain management / Photo: Noam Galai
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