FTC v. Facebook: Lesson for the Indian Competition Regime

[By Rushil Anand]

The author is an associate at ALA Legal.

Introduction –

In what can be the watershed moment for Anti-Trust Cases in 21st Century, the Federal Trade Commission of United States, on 9th December 2020, sued Facebook for maintaining its monopoly illegally. According to the complaint, Facebook over the years has abused its dominance by imposing anti-competitive conditions such as, regressive policies that allow third-party Application Programming Interface (APIs) access to Facebook Blue (platform is generally known as Facebook), only if they are not competing with Facebook. The investigation highlights how certain inherent structural features of the digital market itself make it prone to monopolization. These structural features can broadly be divided into concentration of users, revenue, and data.

India in recent years has seen certain mergers and acquisitions, most notably the Jio-Facebook deal, capable of tipping the Indian digital markets towards monopolization. Scrutinizing the Jio-Facebook deal through this derived framework of structural features, the monopolization risk posed by it becomes evidently clear. Similar to how the concentration of users, data, and revenue with Facebook made the American digital markets prone to its abuse of dominance, the Jio-Facebook, including their stated purpose of combining JioMart and WhatsApp can have serious consequences for the comparatively nascent Indian digital markets. This calls for closer scrutiny of Jio and Facebook’s conduct and incorporating effects of these structural features in future CCI investigations.

Inherent Structural Features –

Concentration of Users

Monopolization risk posed by concentration of users primarily surrounds two digital market phenomenon called Network Effects and High Switching Costs. Networks Effects is a phenomenon whereby monetary as well as the utility value, of a digital platform, increases, at an increasing rate, as more people join the platform. As the number of users increases, it leads to a gain for the existing users of the service, as interactions with more users are possible on the same platform. Furthermore, users will start becoming familiar with the digital platform’s interface, helping them navigate the platform with ease and invest personal time in it by building connections and sharing content (such as pictures and posts) that cannot be moved to other rival platforms. Shifting to another platform will be a loss of this valued personal investment. This cost associated with shifting to a new platform is called Switching Cost. Just like Network Effects, Switching Cost increases over time, to the benefit of the dominant player.

Strong Network Effects and High Switching Cost locks-in the dominant position of a platform, especially for the first movers and creates a dependency once such position is locked-in. Gradually, the effect of these phenomena increases, making it difficult for new competitors to attract users. FTC in its complaint stated that strong Network Effects and High Switching Costs act as entry barriers that help Facebook maintain its monopoly –

“65. Facebook’s dominant position in the U.S. market is durable, due to significant entry barriers, including direct network effects and high switching costs”.

Concentration of Data

Having a large number of users allows a platform to have access to large sets of data. It allows platforms to track broader user trends and any potential competitive threat that can either be copied, acquired or suppressed. Just like the concentration of users, the concentration of data is self-reinforcing as more data allows them to perfect their platforms, which attract users and hence attract more data. Aware of the competitive advantage of data, Facebook pervasively collects data and tracks competitive threats, according to the FTC complaint, to maintain its monopoly.

Facebook in 2010 introduced Open Graph API, which allows third parties to add a Facebook interface to their website. Due to the popularity of the platform and familiarity with its interface, developers were quick to adopt the API. The API allows Facebook to track potential competitive threats by sharing with Facebook data of any user interacting with third-party platforms utilising the Facebook interface. By 2012, the API was estimated to be sharing one billion pieces of social data with Facebook per day. Mike Hoefflinger, former Head of Global Business Marketing of Facebook, in his book “Becoming Facebook” stated Open Graph API was used to track Instagram, as Instagram had enabled the Open Graph API on its platform before it was acquired by Facebook.

Facebook also acquired a digital platform named Onavo, a Spyware VPN provider which unknown to its users, tracked their activity. Through Onavo, Facebook had access to data that helped them track and identify apps that posed a competitive threat before it was forced to shut down the app in 2019. The complaint quotes an internal Facebook document, showing how the acquisition helped them track competitive threats to buy or suppress them –

“With our acquisition of Onavo, we now have insight into the most popular apps. We should use that to also help us make strategic acquisitions.”

Concentration of Revenue

Unlike traditional businesses, most digital platforms do not charge any monetary fee. Instead, they rely on user data which is monetized by being sold to advertisers. This is a very crucial part of their business as advertisement is the largest source of income for most digital platforms. Facebook, according to FTC, earned around $70 Billion from advertisement, 98% of their total revenue. Data sold to advertisers is utilized to personalize advertisements. This form of advertising is called social advertising. It allows advertisers to not only reach large numbers of audiences but also restrict it to likely interested parties. It is a data-reliant mode of advertisement which favours company that can persistently track users’ data. Advertising with Facebook, with over 2.7 billion users per month on Facebook Blue alone, has become necessity for any advertisers to effectively compete in their domain. David Heinemeier Hansson, Chief Technology Officer of Basecamp, in the hearing before the Subcommittee On Antitrust, U.S. House of Representatives Judiciary Committee laid out how refusing to advertise on Facebook is like “competing with one arm behind your back”, asserting that they were losing growth by not advertising on Facebook. This has starved any potential competitor from the biggest source of revenue for digital platforms and denied advertisers benefits of competition.

Lessons for India –

The significance of these factors should be taken into consideration when scrutinizing the benefits of a merger in Indian digital markets. The foremost example is the Jio-Facebook deal, in which Facebook acquired a 9.99% stake in Jio for $5.7 billion and was approved by CCI in 2020. This deal allows the concentration of data of more than 300 million Facebook Blue and 400 million WhatsApp users with more than 370 million Jio Users. Jio and Facebook are also dominant players in their respective digital markets. Furthermore, Jio’s privacy policy as well as WhatsApp’s privacy policy explicitly lays out that, in case of merger or acquisition, they would be sharing user data with their partners. As seen from the FTC’s complaint, such concentration raises serious concerns under Section 6 (1) of the Competition Act, 2002.

One of the stated purposes behind the Jio-Facebook deal is to connect JioMart, Reliance’s online grocery e-commerce platform, with WhatsApp. It will allow users to order groceries from local Kirana shops and SMEs through WhatsApp. Just like how the concentration of users locked-in Facebook’s monopoly, such large access to JioMart through WhatsApp can tip the e-commerce market due to the massive user base JioMart will have access to. Since e-commerce platforms connect opposite parties such as consumers to traders, the value of the service for one party i.e., traders increases when there is an increase in the number of the opposite party i.e., consumers, and vice versa. This is called Cross-Side Networks Effects, where the value of an e-commerce service goes up when the number of opposite parties increases. With WhatsApp providing a gateway to JioMart for its 400 million+ users, JioMart is well-positioned to monopolize the e-commerce market.

Furthermore, Reliance has its Retail Brands such as Good life and Best Farms, which are available on JioMart and grocery retailer chain, Reliance Fresh. Their parent company, Reliance Retail is also in a commercial partnership with WhatsApp and JioMart, signed along with the Jio-Facebook deal. Data of JioMart users from WhatsApp can benefit Reliance’s Retail subsidiary by providing access to consumer data and track rival product performance. Finally, the biggest source of revenue in e-commerce is the commission received from the sellers utilizing the platform. Access to such a substantial amount of users through WhatsApp will make the platform a primary choice of the traders, due to Cross-Network Effects, denying the competing platforms necessary revenue.

As evident from the Facebook-FTC case, the interplay of concentration of users, data, and revenue tipped the market and made it prone to Facebook’s anti-competitive practices. The same interplay through the Jio-Facebook deal, while only in the early stages of implementation, allows them to monopolize digital markets in the years ahead and create barriers for new entrants, which are harmful to the innovation and entrepreneurship of India’s digital sector. However, similar to how FTC is seeking divestitures in acquisitions that were approved by FTC itself, there is no legal bar on CCI that prevents it from investigating its approved mergers and acquisitions. For now, Facebook-Jio’s conduct should be scrutinized due to its massive potential to monopolize various markets. Furthermore, data advantage should be closely scrutinized in proposed and future mergers and acquisitions and the effect of Switching Cost and Network Effect on competition should be part of future investigations and approvals in digital markets.

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