The EU’s Traditional Analysis of the Facebook, WhatsApp Deal – Do We Like it?

October 16, 2014

The European Commission unconditionally cleared the acquisition of WhatsApp by Facebook on 3 October having concluded that Facebook Messenger and WhatsApp were not close competitors and that users would still have plenty of alternative messenger and social network services to choose from after the merger.  The decision means that Facebook has the EU’s green light to complete its merger of the $19 billion deal.

In reaching this conclusion, the investigation focussed on three services markets; consumer communications, social networking, and online advertising.  

In relation to consumer communications services, the Commission found that the two messenger services offered by Facebook and WhatsApp were used in different ways; WhatsApp is used only on smartphones and accessed via phone numbers whereas Facebook messenger could be used on both fixed as well as on mobile devices and users needed a Facebook profile to connect. Since consumers often use more than one messaging service and the Commission considered the market to be dynamic and fast moving, it was found unlikely that the concentration would have a significant effect.

The merger’s potential impact on the market for social networking services was also considered and found to be continuously evolving. While arguably Facebook and WhatsApp were already competitors, since the Facebook service was much richer with a larger range of facilities and features than the WhatsApp networking experience, they were viewed as, at best, distant competitors. The fact that there were other competing apps and the user base of Facebook and WhatsApp already overlapped led the Commission to conclude that the social networking market was unlikely to be negatively affected by the merger. 

Since WhatsApp does not currently display advertising, it was found that the merger would be unlikely to affect the online advertising market. The Commission made a cursory reference to the possibility that Facebook could introduce advertising on WhatsApp or collect and use data from WhatsApp users to enhance its own data portfolio and targeting, but both possibilities were dismissed as being largely irrelevant to the competition issues at stake. In doing so, the Commission commented that there were a sufficient number of alternative providers to Facebook that supply targeted advertising and much of the data used is not exclusively held by Facebook. They also swept aside data privacy concerns raised about the increased concentration of data held by Facebook, on the basis that these were data protection and not competition issues.

This decision was taken against a background of approval in the US. US antitrust authorities already cleared the merger in April on condition that WhatsApp would be subject to Facebook’s 2012 agreement with the FTC in which Facebook is required to give consumers notice and obtain consent before sharing information and to maintain a privacy program. This is hardly a major condition from the perspective of EU law, since such requirements are in any event obligatory under EU Data Protection rules. However, it did require WhatsApp to continue to apply its privacy policy which involved not using consumers’ data for targeted ads, although it is not clear that this would necessarily prevent Facebook using the data collected from WhatsApp for its own targeted ads.

This merger inquiry was an opportunity for the Commission to deepen its understanding and analysis of how competition law will apply to social media, consumer facing digital services and the role of large US technology companies with major online business presence. It also provided a case study in looking at the role that data and data concentration plays in altering market structures and dynamics in online, mobile and digital businesses particularly those with consumer network effects, a key issue in understanding who holds the power in these markets.  

Yet the Commission appears to have analysed this case as if the markets involved were just the same as any traditional services market, focusing on actual horizontal competitive services as the key to determining whether the acquisition could impact competition.  In consumer facing digital markets, with huge operators already holding key market positions, access to large databases of personal information based on networks of hundreds of millions of users probably represents the price of critical market entry (ie the type of entry that could really pose a competitive threat to the status quo). Combinations of large networks which, at the point of merger, are only distant competitors of consumer facing services may, due to the information they hold or their ability to collect such information, be potential competitors of extraordinary potential force. If entities spend years creating those conditions (supported by minimal income), only so that they can be sold off to powerful incumbents before they use the base created to start to compete, how will a truly competitive market emerge? When billions of dollars are paid for a business which has a relatively modest income stream, what might the strategic objective of the acquirer really be?

The themes of network power and priority access to market critical mass data continue to emerge in parallel competition investigations in these markets. In light of the questions the Commission is grappling with over the various Google antitrust investigations and complaints and the recent barrage of criticism of their proposed settlement agreement with Google, it will be interesting to see whether this decision also stands the test of time.

Susannah Sheppard is the founding partner of Sheppard / Co, a boutique competition law practice.