Why a tax on online advertising makes no sense

There has been a fair amount of recent media coverage and comment about a report – “Creativity and Internet” – commissioned by the French Culture Minister which includes a proposal to levy the online advertising revenues of the likes of Google, Yahoo!, Microsoft and AOL. The aim of the levy is to raise money for the French creative industry. Whilst it’s not clear as to whether the French Government will seriously consider this proposal (although President Sarkozy has welcomed the report), Google has already publicly opposed the idea stating that it could “slow down innovation” and that it is “disproportionate.”

Fortunately, such a proposal is unlikely to be seriously considered in the UK. Last summer’s Digital Britain report ruled it out and, in fact, concluded that advertising was an important business model to help web publishers “convert creativity into value.” Prior to this communications regulator Ofcom examined an industry levy as part of its public service broadcasting review and the creation of a public service content fund. Ofcom ended up proposing Channel Four as a public service provider to rival the BBC rather than considering a levy. Creating and funding a dedicated public service ‘publisher’ was also opposed by the House of Commons Culture, Media and Sport Select Committee in its report on Public Service Content: it said that a dedicated new public provider was “unnecessary…distorting the market and impeding innovation”.

So why does this proposal make absolutely no sense?

A tax on online advertising will primarily hit internet users and the websites they use every day (Ofcom’s analysis mentioned this). Advertising is integral to the global digital economy: it supports many of the online services and content we all enjoy and use ever day – search engines, webmail, social networking sites, video and photo sharing facilities to name just a few. As former UK Culture Secretary, Andy Burnham, said to IAB Engage in 2008: “Oceans of creative content available online are supported by the advertising model.” In the UK, online is now the largest advertising platform: nearly £1 in every £4 is spent online by advertisers and it drives commerce, particularly at a time of recession. This year’s Christmas Day online sales were up by 29% on 2008 according to the Interactive Media in Retail Group (IMRG). Online advertising helps foster innovation: search engines and advertising networks send traffic to publishing partners helping them to fund the content and service they make available. Policy-makers need to recognise that there is a significant shift driven by consumers doing more and more online.

In short, the internet – supported by advertising – is a new way of doing business. It therefore should be viewed as part of the solution and not as a problem. The French proposal seems designed to help businesses that have yet to adapt their business models to this new era but – more importantly – it hardly inspires business confidence or fosters a climate ripe for investment.

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    Nick. Before slating proposals for a tax on “the likes of Google, Yahoo!, Microsoft and AOL” I think it appropriate that you declare that the IAB, the organisation you work for, is funded in part by all four of these companies.