The New ‘Amazon-paradox’ – Meta’s Old Innovative Business Strategy

[By Mayank Gandhi & Devansh Lunawat]

The authors are students of National Law University, Nagpur.

 

Introduction –

India’s digital surge has invited the attention of several big economies across the globe. India’s digital economy is likely to surge to USD $1 trillion by 2030. The growth of the digital market can be attributed to multi-sided digital platforms with strong ecosystem and the large appetite of Indian consumers for digital products and services. The growth of digital market is creating new avenues for tech-giants to expand their digital businesses. To further maximize their revenues, these tech-giants are indulging in complex anti-competitive strategies that the traditional theories of harm under competition law are unable detect. Hence, keeping in mind the increasing anti-competitive practices adopted by big-techs, several countries are proposing specific regulations which seeks to regulate anti-competitive behaviour of big-techs in digital market. In this context, this paper critically analyses prerequisite made by Meta of having an Instagram account in order to use their microblogging app, ‘Threads” from the lens of competition law dealing with such conduct. The author also undertakes the task to navigate the approach adopted by several jurisdictions regarding bundling/tying of services or products. Lastly, it advocates the possible way ahead for antitrust authorities to ensure fair competition in the market.

Navigating the treatment of tying practices at international level –

  1. European Union –

Tying is one of the listed behaviours in Article 102 of the Treaty on the Functioning of the European Union (“TFEU”). In Europe, tying is traditionally examined with a de facto per se approach. This approach was exemplified in the Hilti nail gun case, where Hilti required its patent-protected cartridges be supplied with Hilti nails. The IBM case was one of the first instances of tying dealt with by the  European Commission. One of the arrangements included a refusal by IBM to supply its specific software to users unless the software was used by a CPU manufactured by IBM. In another case, Microsoft used to provide Windows Media Player (WMP) enclosed in the Windows operating system. Such practice increased the barriers for new entrants of such media players. Microsoft was found in violation of Article 82 TEC (Article 102 TFEU). The Commission reasoned that such tying would weaken market competition.  In recent times, the General Court confirmed the abuse of dominant position by Google, for tying its operating system (OS) with the Google Play Store. Recently, the Commission announced the opening of formal investigation against Microsoft to assess its practice of tying or bundling Microsoft Teams with Microsoft 365 and Office 365.

Before an arrangement can be termed as tying, certain conditions must be fulfilled. Primary among them being the existence of two separate products. As per The Guidelines on Vertical Restraint: “Two products are distinct if, in the absence of tying, from the buyers’ perspective, the products are purchased by them on two different markets.” However, it is not necessary that the products originate from different markets. This position was also highlighted in the DG Competition Discussion Paper. Complementary products can also constitute distinct products. The second requirement is to prove that the company is dominant. Dominance in this context shall mean that the company’s action are not influenced by that of its competitors. Secondly, it shall be proved that the company is dominant, i.e., the extent to which a company can behave independently of its competitors or customers. Foreclosure, which can be traced back to Hoffmann – La Roche case is another requisite, that refers to the harm in either the tied or tying market or in both the markets. The only defence available to the parties is to justify that their act is likely to generate efficiencies for consumers that outweigh the negative effects. In this way,  tying is per se restricted in European Union and the burden is on the parties indulging in such activities to prove that the benefits of such agreements will outweigh their adverse effect on competition.

  1. United States –

Tying in the United States is usually challenged under either Section 1 of the Sherman Act or Section 3 of the Clayton Act. The test applied to ascertain legality of tying under both statutes is functionally the same. In the International Salt Co. case, the company owned patents on two machines that were used for utilizing salt products. The lease agreement required buyers of the patented machinery to purchase all of their salts from the company. The International’s tying clause was challenged by the Department of Justice. In this vein, the US Supreme Court held the tying clause illegal as it prevented other firms from directly supplying salt for use in patented machines. In 1947, the US Supreme Court found the tying clause illegal as it prevented other firms from directly supplying salt for use in the patented machines. In subsequent years, the scepticism of US courts concerning tying behaviour grew. The skepticism was based on the notion that tying arrangements generally serve no legitimate business purpose that cannot be achieved in some less restrictive way”, therefore negating the requirement of ascertaining even a dominant position.  However, this position was changed in 1969 following the judgement in Fortner I and later in Illinois Tool Works delving into the concept of market power.

In cases relating to tying in software platforms, the landmark case was decided by D.C. Circuit against Microsoft for tying Internet Explorer (IE) along with the Microsoft Windows (OS).   One of the factors that was taken into account by the court was that IE and OS are separate products. More recently Epic challenged Apple’s practice of tying the use of its iOS devices to Apple’s App Store and subsequently with Apple’s IAP system. The judgement was largely in favor of Apple principally on the ground that Epic failed to propose a substantially viable less restrictive alternative to Apple’s restrictions as well as a failure to propose market definition.

American jurisprudence has developed two methods for ascertaining anti-trust violations. Firstly, the per se illegality rule, wherein it is required to prove a) the existence of two distinct products b) existence of sufficient market power by the defendant in the market of the tied product c) there is a compulsion on the buyer to purchase the tied product also known as conditioning d) substantial foreclosure. In cases wherein defendants are found liable under the per se illegality rule, a defense open to be taken is that of proving that the procompetitive benefits of the defendant’s conduct outweigh the potential anti-competitive effects.

Treatment of tying practices under the Indian competition law –

Section 3 of the Indian Competition Act declares an anti-competitive agreement void. Tying refers to a situation wherein the purchase of a product or service (tying product) is made subject to the purchase of another separate product or service of that same undertaking (tied product). It can be either contractual or technical in nature. Such arrangements are referred to as tie-in arrangements under Section 3(4)(a) of the Competition Act. As per the said Section, the burden is on the Commission to prove that the proposed agreement is likely to have an appreciable adverse effect on competition.

One of the landmark cases decided by CCI in Sonam Sharma vs Apple, has held that while examining the practice of tying under competition law, firstly the Authority should establish presence of two separate products/services capable of being tied and secondly, the impugned enterprise have sufficient economic power with respect to the tying product market.

Critical analysis of Meta’s tying practice vis-à-vis Indian antitrust regime –

The microblogging market in India is very concentrated as there are very few competitors in the market like X.Com (formerly known as Twitter). The entry of Meta through its application called ‘Threads” in the aforesaid market has given a new alternative to Twitter. It has crossed 100 million viewers in just 5 days. Interestingly, it is required to have a prior Instagram account for user to access Threads. Such requirements coupled with the unprecedent growth of an app, have raised serious competition concerns.

In the instant case also, mandating users to have Instagram accounts coupled with the privacy policy of Meta of combining user data across its product would not only strengthen its position in the personal social media networking market but is also likely to create entry barriers for new entrants in the market for microblogging services.

Also, the strong network effects coupled with Meta’s privacy policy of combining data are significantly likely to create entry barriers for new entrants in the market who do not have strong ecosystems as Meta does.

Moreover, such tying-arrangements adversely affect consumer welfare. Consumer harm can result due to ‘coercion’. Since, users are forced to have an account on Instagram to access the services of ‘Threads’, it can be said that the element of coercion is very well present in the present case. Accordingly, such arrangements made by Meta are likely to result in consumer harm.

Concluding remarks – A way forward

The author proposes that, as per the approach taken at the global level, such agreements entered into by digital intermediaries with significant market power are regulated ex-ante meaning thereby that tying agreements by gatekeepers are presumed to be anti-competitive and accordingly void in nature. In this regard, the standing committee report on finance has also suggested that there should be an ex-ante prohibition on significantly important digital intermediaries to tie-in their other products/services with their core services. The approach taken by the committee seems to be a valid approach and it is the need of the hour for the Commission to act proactively in tackling such anti-competitive agreements entered by significantly important digital intermediaries because delay on the part of the antitrust regulator to react would render the remedies provided by the Commission ineffective and would also lead to market failure.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in