The unique intervention by the Coalition government against the two digital giants, which collect more than $US230 billion ($310 billion) combined in annual revenue globally, will be closely watched in Silicon Valley and by governments around the world.
It recognises the competition watchdog’s conclusion that there is an imbalance in bargaining power over issues such as sharing advertising revenue between news publishers and big digital platforms.
Because news media play a vital role in democracy holding governments to account, uncovering corruption and keeping communities informed ensuring a sustainable revenue stream for their work is deemed by Parliament to be in the public interest.
Nevertheless, the government has zero interest in immersing itself in how much Google and Facebook pay news publishers, including Nine, owner of The Australian Financial Review.
“That isn’t for the government to speculate on,” Communications Minister Paul Fletcher said.
“There would be commercial negotiations between a business that is producing content and a business that is using content.
“What we’re trying to do is establish a regulatory framework under which commercial negotiations occur, and it will be for the individual businesses to negotiate.”
Previously, Nine estimated that the industry pool could be worth about $600 million and News Corp suggested the number is closer to $1 billion.
The government watered down its original draft proposals because of the reach of Facebook and Google to millions of local users including for small business advertising and their threats to cut off Australia from their social media and search services.
Frydenberg and Fletcher spent Tuesday morning phoning the local heads of Facebook, Google, News Corporation, Seven, Nine, Ten, the ABC and SBS, trying to convince the disparate parties that it had reached a “fair” and “balanced” outcome.
Local media organisations do not like the exclusion at least for now of Facebook’s Instagram and Google’s YouTube from the code.
A new “two-way value exchange” model will give the tech giants the chance to discount their payments for news by taking into account the benefits the media organisations derive for Facebook and Google driving traffic to their websites.
Some news providers already pay Facebook and Google to appear more prominently on their platforms, which could help provide some pricing benchmarks but has also aroused concern among media executives that there could be double counting.
Ultimately, the two-way value exchange calculation is likely to lead to a new fight over the value of the digital giants and media organisations to each other.
The “negotiate-arbitrate” framework will put the onus on the two digital platforms and news media businesses to reach commercial outcomes.
It is similar to that used for smaller competitors to access infrastructure in the telecommunications and energy sectors.
If the parties fail to strike a deal in good faith, an arbitrator appointed by the Australian Communications and Media Authority will be called in. The ACMA-driven auction process will encourage market-like pricing.
Both parties will make their best offer, and the arbitrator with some flexibility to judge if the bids are in the public interest will select the most reasonable bid.
The auction mechanism rewards realistic offers and punishes dubious offers, drawing on the lessons of Nobel economics prize winners Paul Milgrom and Robert Wilson, who designed new auction formats for goods and services that are difficult to sell in a traditional way.
Ultimately, the devil will be in the detail in legislation that the government has regrettably delayed releasing until Wednesday after its announcements and press conference on Tuesday.
Local media companies have not received everything they want but will live with the reforms because they are better than the status quo.
The ball is in the court of the tight-lipped Facebook and Google, who are worried Australia’s shake-up will set a precedent to better share their advertising revenues and be adopted by other governments around the world.