Blowing the lid off Reliance Facebook merger A case for Data motivated mergers

Introduction

Recently social media behemoth Facebook Inc. sought to acquire a 9.9% minority stake in Jio Platforms through the creation of a new entity Jaadhu Holdings LLC. The Mark Zuckerberg controlled entity invested $ 5.7 billion in the telecom platform owned by Indian business Mogul Mukesh Ambani. This makes it the largest FDI in the technology sector ever in the country. The data driven merger between the two is expected to be subjected to a vigilant scrutiny by the Competition Commission of India (CCI).

Data has been a pretty vital cog in the constantly evolving digital space as the world experiences a paradigm shift towards work from home trend, which is only going to increase as the COVID-19 pandemic passes.

Big Data and its competitive edge

‘Big Data’ can be defined as a large combination of datasets which can be distinguished by the three V’s known as high volume, velocity and variety and transformed by appropriate technology for its conversion into innovative forms of information for improved insight and decision making. Markets have used big data to their advantage by working on data driven network effects such as search engines, sponsored ad targeting and utilising cookies to market their products on social networks. Companies design specialized algorithms to thrive by feeding on sentiments related to specific goods and services to determine customer preferences and product’s appeal to future users. Due to aggressively changing dynamic of data market, there are several factors other than price effects of a transaction which should be taken into consideration by competition authorities while determining hold in the market. These aspects include social media and telecommunication sectors offering free services and are valued for their determinants such as product quality, data protection and product modernization. This can be inferred from impeding the prospective merger of Bazaarvoice and PowerReviews, the US Department of justice disallowed the said merger due to its inherent fear of its monopoly in ratings and reviews market. The share of control over data is a pertinent determinant to determine market power of non-price markets.

The current merger control authority regime does shed light onto the fact that when data driven mergers are on a rise, ample attention is not being given to the competitive nature of data and how it acts as an asset for deterring competition. Mergers with an objective to access new data can potentially cause entry barriers, privacy breaches and market foreclosure. This is fueled by the fact that most digital service providers escape scrutiny by competition regulators due to the provision of providing free services. Companies such as Jio Communications and Facebook have an enormous user platform in distinct markets that would give them such a leverage that could lead to market lobbying by providing exclusive contracts with peer data service providers. Further the threat of companies getting unrestrained access of every minuscule detail to determine consumer’s preferences and influence them to pay for a particular service.

Consumer’s privacy protection is the most pertinent factor and forms the bedrock of trust for companies which provide free services. It’s the onus of Competition authority to determine whether the intrusion of privacy is in the form of data trading, amassing loads of data in tandem with customer focused advertising or is balanced with other efficiencies of the service in question. The remedies that might be offered by such companies in order to resolve privacy issues, or aggrandize privacy on a particular front, could agglomerate dissimilar restrictions in the market which could jeopardise other actors in the market.

Facebook, party to the prospective merger has always found itself in dire straits when it comes to privacy concers of its user base. Earlier in 2013, Facebook was investigated by Bundeskartellamt for suspicions of abusing its dominant position in market for social networks by presenting unlawful terms and conditions for the use of consumer data. The investigative agency found Facebook guilty of combining user data from its other subsidiaries like WhatsApp and Instagram and assigning it to the Facebook user account in order to pursue targeted advertising. This practice allowed Facebook to build a unique database for each user and utilizing the data to gain more market power. This infringement was held ultra vires to the purview of Competition law as it put Facebook on an unfair pedestal than other peers in the market.

The competition authorities have always judged and evaluated mergers based on asset turnovers both in India and as well as across the world. It has enabled the two-sided market mergers to escape with free services tag as enforcement authorities mainly look on the impact of merger on prices of services. Indian Competition Law review in its assessment report focused on impact of data driven mergers and scrutinized whether section 2(o) of the Competition Act, 2002 needs to be expanded to encompass non-monetary perks such as data. It was observed by the committee that the section need not be amended but it is true that platforms offering free services collect their revenues by offering consumer’s private data and preferences to organisations that monetise the data through target advertising. The CCI regulations often get eluded by acquisitions as the rules for such mergers are not dynamic and are effective for conventional mergers only. For instance, section 5 and 6 of the Competition Act, 2002, read together provide regulating mechanism for mergers in the market. Section 5 entails the definition of mergers and section 6 provides regulations for such mergers. The mechanism in section 6 only has the power to regulate combinations defined by section 5 and the restraints stipulated by it are only in terms of assets and turnover.

Facebook’s acquisition in Reliance Jio

Reliance Jio is the leading force in telecom market. Jio platform, the digital wing of Reliance and Facebook both occupy significant majority hold in their respective markets and this merger also makes Facebook the biggest minority shareholder in Reliance industries Ltd. As the case seems that the governing authority has mostly been passive in putting curbs over data driven mergers although there have been numerous occasions in which Competition Commission of India has intervened in digital markets dominant position abuse. In the past taxi aggregator Ola was accused of imposing predatory price due to it having surmounted 50% market share, even CCI fined Google for its “search bias” using its dominant position in the market as a leverage. Similar suspicions were raised in the matter of acquisition of Flipkart by Walmart but it was dismissed as there was no data sharing aspect. For the merger of Flipkart and e-bay, CCI dismissed the accusations of the potential data sharing due to companies having a share less than 20% in the market.

Now Reliance Jio which happens to be the biggest mobile telecom tycoon in India providing services to more than 388 million users across the country. It holds a subscriber base of a whopping 37.1% of the whole market. On the other hand Facebook which controls all the prongs in the messaging service markets through its services like WhatsApp, its photo sharing app Instagram and other services. Facebook earlier in 2015, launched its free internet service known as Free Basics, which subsequently got banned due to TRAI’s clear policy of not allowing zero-rated internet services as it defeats the purpose of net neutrality. It is hailed to be the second attempt of the Social Media Giant to penetrate Indian Market with the aid of Jio Services. Both of the Goliaths can afford losses by providing services substantially below the current market rates to lure a larger user base. This could act as a deterrent for new entrants in the market as well as impede other peer competitor’s business. It is apparent from the huge splash that Jio’s dive in 2015 created in the telecom sector, many operators had to simply detract them from the market resulting in only remaining three private sector wireless providers. CCI called the practice “penetrative pricing” but decided not to take any action against it due to the case being Jio’s parent company Reliance has enough wherewithal to withstand early losses. In a report published by CCI on market study in e-commerce in India, CCI pointed out that many e-commerce companies engage in preferential treatment by selling and highlighting the products of their own subsidiaries or related entities. This many times leads to small startups and low capital businesses getting nipped in the bud.


Conclusion and way forward

Large chunks of data are always a critical asset to data driven organisations and acts as a driving force for significant mergers, investments and acquisitions. Albeit it is always stated by the companies that they do not indulge in the practice of data sharing but there are little or no regulations present to avert that from happening in the future. The data protection law is yet to pass and the inherent danger in data trading to overseas companies is apparent. Data privacy is becoming a pertinent component in determining competition. In tackling gigantic data driven mergers, it is necessary that some regulatory updates should be made. In Germany, the definitions under German Competition Act are being updated to keep up with the free services tag proposed by the digital platforms, they have added “the assumption of a market shall not be invalidated by the fact that a good or service is provided free of charge.” This coupled with lowering the threshold for notifying the competition authority has made them aware of takeover of small firms by multinational firms. Singapore came up with an amendment in the competition act under Section 55A(3), which shifts the burden of informing the competition regulatory authority if their merger could disrupt competition and if company fails to notify the regulating authority and the merger hampers the market, then the Competition Authority may take whatever step they consider apt. This was the reason behind Singapore to deter the merger between Uber and Grab as if the merger would have gone forward it would have captured 90% of the market. India has before recognized the threats of big mergers to the competition and applied appropriate remedies to fix them. The aim of the Competition Act is to make sure the free flow of trade and fair competition persists and later the consumer well-being. It is the onus of Competition Commission of India that when digital markets jump on the scene consumer’s privacy and fair competition are weighed on the highest touchstone.


Author - Nipun Mudgal,Student of Gujarat National Law University.


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