Unfair competition in internet advertising blocking in China: part one

On August 24 2023, an official account on WeChat, Daxiaojie LiTiaotiao, announced an indefinite suspension of all its updates. The decision was prompted by a legal demand letter from a major internet company, Tencent, claiming that the mobile application that Daxiaojie LiTiaotiao developed and operated, LiTiaotiao, constitutes unfair competition and thus violates the Anti-Unfair Competition Law of the People's Republic of China.

LiTiaotiao utilises the accessibility features of Android devices to simulate automatic clicks, so as to skip various splash screen advertisements. Similar functionalities can be found in other Chinese apps such as Light Start, YizhiChan, ZidongTiao, DingXiaotiao, and DashengPurification, all of which primarily aim to skip splash screen advertisements of other mobile apps. There are also software plug-ins in the Chinese market with richer functionalities and applications, allowing users to skip various types of advertisements on websites, videos, and apps. Examples include AdBlock for browser advertising blocking, or ad-blocking, and AdGuard for versatile application scenarios.

The various ad-blocking apps, software, and plug-ins differ in their principles of operation, application scenarios, and profitability. But what conditions must be met for ad-blocking to be considered unfair competition? Does the service LiTiaotiao provides qualify as unfair competition? This two-part series will conduct a legal analysis of these questions.

There is no unanimous opinion with regard to whether internet ad-blocking should be regulated by the Anti-Unfair Competition Law. However, there are three main perspectives.

The affirmative view holds that internet ad-blocking should be regulated by the Anti-Unfair Competition Law. The core argument is that the business model of an internet business determines that profiting through advertising is, to some extent, legitimate.

In a typical ‘freemium’ model of internet business, free users obtain internet services for free and the service providers are compensated for their cost through alternative means, including payments from advertisers. Instead of paying a high customer acquisition cost, the service provider might as well acquire initial users with free access to a limited set of features and generate benefit from them by running ads or through paid ad-free subscriptions.

As the developer of AdGuard pointed out, "As many excuses as it may take, the most likely reason is simply that ads are just too profitable. No subscription income could possibly be of the same level with the revenue generated by ads."

In other words, as big a role as advertisement plays in the internet business model, appeasement towards ad-blocking may jeopardise the sustainability of that model. In the short term, service providers may be unable to cover their operating costs, leading to a reduction in the supply of free content. In the long term, if the impact of ad-blocking on service providers is critical to their survival, they may eventually withdraw from the free content market.

Therefore, the affirmative view believes that in the specific business model of the internet, ad-blocking harms the economic interests of service providers. These economic interests result from legitimate business activities and deserve protection under the Anti-Unfair Competition Law.

The arguments behind the negative view mainly concern consumer rights, technological resistance, and legal protection of business models.

Firstly, the law does not protect specific business models, and advertisement is merely one means for internet service providers to derive a profit, not their statutory right.

Secondly, the damage caused by ad-blocking is very limited and is not enough to overturn the entire internet industry's business model. Furthermore, ad-blocking may also incentivise network service providers to improve their advertising delivery models. From a long-term perspective, the limited damage a service provider suffers is a reasonable cost of technological innovation.

Thirdly, online advertising may cause certain interference for users/consumers, and targeted advertising with big data may involve issues such as infringement of user personal information and privacy, harming consumer welfare. From a standpoint of technological neutrality, new technologies may benefit consumer rights protection, and the potential harm to operators' interests due to technology does not automatically negate its legitimacy. Moreover, this potential harm is by no means unresolvable: one simple and direct solution is reverse engineering.

Due to the reasons above, the negative view opposes legal intervention and advocates resolving the issue through market competition mechanisms.

The compromise view believes that the question of whether ad-blocking constitutes unfair competition should be determined differentially based on specific cases. For example, considering factors such as advertising duration and operator revenue ratio in a comprehensive manner may help to achieve a balance between consumer interests and operator interests.

The compromise view reconciles the affirmative and negative views, but there are no clear provisions on what are the exact indicators. Some scholars argue that adopting a quantitative approach might make regulations more objective.

China's regulations on internet advertising trace back to the Interim Measures for the Administration of Internet Advertising that were implemented from September 1 2016 but are now obsolete. Article 16 of the measures provided that "in internet advertising activities, the following actions are prohibited: (1) providing or utilising applications, hardware, etc., to intercept, filter, cover, fast forward, or impose other restrictive measures on advertisements of others' legitimate operations; (2) using network channels, network equipment, applications, etc., to disrupt normal advertising data transmission, tamper with or block others' legitimate advertisements, or load advertisements without authorisation; (3) using false statistical data, spreading false effects, or internet media value to induce incorrect quotations, seeking undue benefits, or harming others' interests."

Before the 2017 revision of the Anti-Unfair Competition Law, courts typically invoked the ‘general clause’ in handling similar cases. This clause, Article 2 of the Anti-Unfair Competition Law (1993), provides that "a business operator shall, in his market transactions, follow the principles of voluntariness, equality, fairness, honesty and credibility and observe the generally recognised business ethics. ‘Unfair competition’ mentioned in this Law refers to a business operator's acts violating the provisions of this Law, infringing upon the lawful rights and interests of another business operator and disturbing the socio-economic order. ‘A business operator’ mentioned in this Law refers to a legal person or any other economic organisation or individual engaged in commodities marketing or profit-making services (‘commodities’ referred to hereinafter includes such services)."

After the 2017 revision, an ‘internet clause’ was added in Article 12: "A business entity engaged in production or distribution via the internet shall abide by the provisions of this Law. A business entity shall not, by using technical means to interfere with users’ choice or otherwise, commit any of the following acts that affect or sabotage the normal operation of any online product or service lawfully provided by another business entity: (1) Without consent of another entity, inserting a link or forcing a URL redirection in an internet product or service lawfully provided by the said other business entity; (2) Misleading, tricking or forcing users to alter, shut down, or uninstall an internet product or service lawfully provided by another business entity; (3) Causing, in bad faith, incompatibility with an internet product or service lawfully provided by another business entity; or (4) Any other act that interferes with or sabotages the normal operation of internet products or services lawfully provided by another business entity."

Part two will examine several Chinese judicial precedents relevant to this discussion, and analyse whether LiTiaotiao constitutes unfair competition.