Technology firms have a pattern of seeing exponential growth in a time of economic pain. IBM famously pivoted from a hardware giant to software firm during a recession in the 90s. Google ironically was born during the dot-com bust. While smaller-niche competitors are grappling with the likely long-term impacts of COVID-19 and the concomitant uncertainty, the New York Times recently reported that Amazon, Apple, Facebook, Google and Microsoft hold cash reserves of $557 billion. With valuations at an all-time low, they are ideally placed to wipe the slate clean of the competition.
The five largest technology companies made over 400 acquisitions in the last decade. Despite creating several data monopolies/oligopolies, none of these acquisitions was blocked and very few had conditions attached to approvals granted by anti-trust authorities. In India too, prominent acquisitions such as Flipkart-Myntra, Ola-TaxiForSure, and Snapdeal-Freecharge escaped regulatory scrutiny because potentially problematic combinations can no longer be identified using traditional metrics like revenue and asset size. Additionally, because with the emergence of digital economies, “free” services are increasingly offered in exchange for mined data, meaning that the traditional test of consumer welfare (measured only through changes in price) is ineffective.
A case in point is Facebook Inc’s recent acquisition (through a wholly owned subsidiary Jaadhu Holdings LLC) of 9.99% of Jio Platforms which includes an agreement whereby Reliance Retail’s Jio Mart will now conduct e-commerce on WhatsApp (owned by Facebook). The network power wielded by these two entities is unprecedented. Jio not only has the highest number of subscribers of any mobile service provider (32% of 1.15 billion users) but also the highest revenue share. There are 400 million WhatsApp users in India alone.
The logos of Facebook and Jio. Illustration: The WIre
The union of two dominant players at different levels in the supply chain facilitates the creation of “two sided markets”. In such a network, users are both, the source of data as well as the product that is sold to advertisers (who are the true customers and provide revenue). As more users join to enjoy the network effects, it sets in motion an irreversible feedback loop, where the platform constantly benefits from the aggregation of ever more data creating opportunities to raise barriers (gatekeeping, leveraging and information exploitation) to entry for potential rivals that lack enough data to develop competitive products. These barriers coupled with network effects and feedback loops tip digital markets towards a single winner.
Google’s Research Director once suggested: “We don’t have better algorithms than anyone else. We just have more data.” If data-motivated acquisitions are left unchecked, digital markets could see degraded quality of service, security risks, significant costs on third parties, less innovation, less autonomy, and pose political risks.
Also Read: Facebook-Jio Deal: What India’s Competition Regulator Will Have to Consider
Press releases by Reliance and Facebook in April suggest that data sharing is not presently part of the deal, with the managing director of Facebook gone on record stating that there will be no data sharing. However, an alignment of interests between the two companies to share data is irrefutable. In addition, Facebook has a history of backtracking on similar assurances. In 2017 it was fined $122 million by the European Commission for making “incorrect or misleading” information regarding its intention and ability to match user accounts on Facebook with WhatsApp. Whether Facebook pulls the same trick a second time remains to be seen, but the Competition Commission of India (CCI) would be wise to be cognizant of the possibility.
In this background, CCI chairman Ashok Kumar Gupta’s comments last week that “currently, some mergers and acquisitions escape the threshold for scrutiny even if potential harm is evident,” and that peculiarities such as “strong network effects, high returns to scale and access to a huge amount of data” may incentivise digital firms to engage in anti-competitive conduct, struck a welcome note.
However, on Wednesday evening, the CCI accorded its approval to the deal. While the detailed order is awaited, the approval amplifies the need for competition law reform.
Below, I discuss strategies to update India’s anti-trust law (Competition Act, 2002) to accurately identify potentially anti-competitive mergers on the basis of relevant indicators and appropriately regulate the same, accounting for potential adverse effects such as loss of innovation and reduction of data privacy.
Identifying potentially anti-competitive Combinations
Consistent with predominant international practice, India has a mandatory notification regime where mergers/acquisitions (known as Combinations) exceeding prescribed thresholds of revenue and turnover must be notified for competition clearance unless they qualify for statutory exemptions. However, in digital markets, acquisitions often derive value from data held by or innovation of the target. Even if accounts record book values of these intangible assets, they often do not correspond with their market value. Coupled with the long gestation periods before these digital B2C businesses raise prices to make profits, the small asset size and turnover of such companies mean that traditional tests fail to capture such transactions.
While various jurisdictions have experimented with the introduction of residuary powers for regulators to assess such transactions, a more definitive approach has been adopted by Germany and Austria in introducing deal-value thresholds. This approach has also recently been recommended in the report of an expert committee tasked with reviewing the Indian competition law framework.
Policymakers must tread cautiously here. Introducing such a threshold in India will require the consideration of several nuanced issues including accounting for fluctuations in the value of listed shares while calculating the deal value, computing the deal value in case of earn-outs, deferred consideration and other payment structures, and introducing an appropriate local nexus test to avoid catching deals that may not have an impact in India. Due to the complexity of these issues, policymakers must first hold detailed consultations with affected stakeholders.
I believe, the market, too, would welcome such a move instead of the introduction of residuary powers since it would usher in predictability in regulation.
In digital markets, acquisitions often derive value from data held by or innovation of the target.
Evaluation of Notified transactions
Once a Combination is notified to the CCI, the regulator is tasked with determining whether it is likely to have ‘an appreciable adverse effect on competition’ (AAEC) viz a ground to reject the proposed transaction.
Having referred to data as the new oil in 2012, the CCI recognised consolidation of data and its role in creating barriers to entry for competitors as a parameter to determine possible AAEC for the first time in 2018. However, the reasoning contained in the judgment is brief and unclear –in concluding that the Combination is likely to create barriers to the entry of competitors, the CCI did not consider pertinent determinants such as network effects or feedback loops, and the thrust of the CCI’s concern relates to more conventional anti-competitive measures such as bundling and gatekeeping. As such, having been commissioned almost immediately following this judgment, the report presented an opportunity to update and codify the mandate of the CCI in relation to factors to be considered in the determination of AAEC for Combinations in the digital market. However, the issue is not addressed.
Also Read: Four Reasons Why Facebook is Buying a Nearly 10% Stake in Mukesh Ambani’s Reliance Jio
The report also fails to advance the discussion on the impact of anti-competitive Combinations on data privacy. Previously, the CCI has held privacy concerns to be outside of its purview. However, privacy protections are a form of non-price competition, particularly in industries where the service itself is ‘free’. If two horizontal competitors compete on privacy as an aspect of product quality, their merger could be expected to reduce quality. While the Bundeskartellamt and other European regulators appear to subscribe to this view, US competition authorities tend to consider that absent immediate consumer harm, notably, in terms of price, scrutiny under the Clayton act is not to be attracted and that forcing firms to share data would have chilling effects on innovation.
Policymakers are faced with a challenge to strike a balance between capturing anti-competitive transactions and managing the consequential regulatory burden. First, a clear determination is required as to whether the digital market in India has achieved maturity to benefit from protection of competition.
Additionally, to ensure both the effectiveness and the ease of application of the remedy and to preserve ex-ante incentives to innovate (i.e. avoid unintended chilling effects), the scope for deliberations must also be widened to explore divestiture/structural changes and behavioural/duty-to-deal mandates as innovative means of preserving transactions while accounting for their anti-competitive effects.
Akhil Bhardwaj is an attorney who practices information technology law.