[By Tawishi Beria]
The author is a student at the Jindal Global Law School.
With the rise in digital activity across the globe, there has been a growth in the might of a select few companies in such digital markets. This has raised several concerns, including antitrust and privacy-related issues. Consequently, there has been increased discussion and debate on the need to alter how competition authorities conduct merger assessments in digital markets. One such proposition is the use of non-price parameters in the merger review process. This is the second part of a two-part piece that seeks to analyse two specific non-price parameters, namely, innovation and data privacy in merger review considerations in digital markets.
Part I of this piece (available here) assessed the need to consider the parameters of innovation and data privacy independently. It also assessed the need for striking a balance between the two and briefly deliberated on how such a balance could potentially be achieved. This part of the piece assesses the application of the factors of innovation and data privacy in two deals involving Facebook, i.e., Facebook/WhatsApp and Facebook/Instagram given that these deals have been subject to intense debate. It concludes by highlighting the need for changes in the assessment of mergers on part of competition authorities.
The Facebook Saga
Facebook is one of the BigTech firms that has engaged in a significant amount of M&A activity, entering into deals with not just fairly well-known companies like WhatsApp but even targeting smaller start-ups. It has also been accused of hurting innovation by copying and killing off the acquired entities. Additionally, privacy concerns with the functioning of Facebook and its allied entities (like WhatsApp’s recently updated privacy policy) are no secret. Accordingly, an analysis of its M&A deals in hindsight is warranted.
1. Facebook/Instagram
The Facebook/Instagram deal tilts towards innovation considerations in merger review generating significant debate on the issue. Concerns of privacy invasion were also raised when the deal was announced with many users removing their data (pictures) from and even quitting Instagram. In 2012, when the 1-billion-dollar deal was approved, neither the FTC, not the UK OFT raised any problems, opining that in the short run, Instagram would not be able to compete with Facebook.
The harm to innovation caused by this deal was brought to the fore recently in the US congressional hearing on the dominance of BigTechs. Facebook’s internal emails revealed communications between CEO Mark Zuckerburg with CFO David Ebersman, stating that the purpose of M&A activity was the integration of products and neutralising the competitor. In terms of privacy concerns, before the acquisition, Instagram had privacy-protective policies with the company pledging to not disclose personally-identifying information, except to certain persons. However, Instagram’s privacy policy dealing with changes in ownership now allows the transfer of information of users to the new owner. Adverse impact on consumer welfare results from this.
Had the innovation and data privacy parameters been considered by the authorities at the time the deal was cleared,it would have been conditionally cleared or even not approved at all owing to its evident anti-competitive purpose. The question of a balance between the two factors does not come in here since the deal essentially compromised both. However, even if the authorities did not foresee the loss of innovation at the time, the privacy concerns were largely overlooked, despite contentions that authorities paid more attention to the users’ side.
2. Facebook/WhatsApp
The Facebook/WhatsApp deal, on the other hand, tilts towards data protection and privacy considerations and has generated significant debate on the issue. Despite indications of the privacy of users being compromised if the two companies were to match and link the data collected by each of them (user’s phone numbers through WhatsApp and identity through Facebook), this aspect was taken lightly at the time of approval. The innovation aspect was fairly minor since the underlying assumption was that consumers would merely switch to other service providers if the merged entity reduced innovation, possibly underestimating the operation of network effects.
While Facebook had ensured the authorities that it would not alter WhatsApp’s privacy policies which were arguably superior pre-merger, two years after the deal went through, the policies were changed. These changes were made to improve the product offerings (possibly aiming for innovation and consumer welfare), but were, in reality, a direct effect of Facebook’s attempt to monetise its investment in WhatsApp. The Commission did assess the impact of network effects in the consumer communications app market, noting that services are often offered free to reach a critical mass and exploit such effects. However, the impact of an increase in market power arising from network effects, keeping consumers locked in, and reducing the incentive to innovate was arguably overlooked.
In this case, aspects of innovation and privacy in terms of the potential to gain competitive advantage through big data and operation of network effects were looked at in some more detail than the Facebook/Instagram deal. While this may reflect an increased willingness on part of the authorities to undertake robust market analysis, dismissing the concerns that came up essentially brings the assessment back to square one. Had the closer focus been placed on the balance between the factors, the deal could have been conditionally approved or not cleared at all, instead of later imposing a fine on Facebook for providing misleading information.
The way ahead
While a trade-off between losing out on beneficial mergers and creation of more competition post-merger is often considered, that between factors looked at for merger review also warrants discussion. The reality post-merger is much different from what was anticipated while approving the deal; conglomerates have been seen as not becoming successful innovators as apprehended and compromising on user privacy by combining data obtained from individual companies. Facebook’s acquisition of Instagram and WhatsApp particularly appear to be horizontal mergers in hindsight, which should have undergone proper scrutiny by authorities.
Several authors have suggested the need for changes in enforcement, proposing a shift from ex-ante regulation to ex-post regulation of M&A deals. As stated in Part I, this may not be the best approach just yet. Instead, a robust market analysis is the need of the hour, focussing on the characteristics of data to determine where the balance between innovation and data privacy lies. The possibility of imposing conditional remedies to tackle lack of foreseeability at the time of clearance can also be explored, especially in deals involving start-ups where the counterfactual may not be defined accurately enough. Such deals have immense importance from the innovation perspective to prevent it from becoming a killer acquisition.
Further, to decide which M&A deals with screen among the huge number of transactions, the value of the deal can be looked at, specifically since the ‘social costs of an incorrect clearance may be higher in digital markets’. In assessing data-driven mergers, the Commission has tried to largely avoid over-enforcement. The merger review framework has shown a positive shift from complete non-consideration of these factors to acknowledging their operation more recently. With ever-increasing advocacy for the right to privacy of consumers along with awareness about the perils of big data in the hands of digital companies, the pressure on competition authorities to consider these parameters is also significant.