Value of data matters when mergers are assessed for competition effects
Digital platforms inquiry looks into ways to better deal with the market power that may be exercised by digital platforms such as Facebook and Google
The Australian Competition and Consumer Commission recently released its preliminary report on the digital platforms inquiry, which is looking into ways to better understand and deal with the market power that may be exercised by digital platforms such as Facebook and Google.
Given that it is often a concern that large tech firms achieve power through acquisitions, this forms part of the inquiry. In particular, the commission has also recommended that the standard for assessing mergers be adjusted to explicitly take into account the relevance of data acquired in the transaction.
This is not the first time this consideration in mergers is seen, particularly in international markets. In particular the May 2017 Facebook-WhatsApp €110m post-merger fine lends some lessons here. These considerations raise some issues for local competition stakeholders (businesses and authorities alike) to consider, particularly in carrying their assessments of transactions in markets that not only involve digital platforms but also those involving a great deal of data, such as in the retail, insurance and telecommunications sectors.
The potential concern here follows on from the fact that there may be a self-reinforcing “network effects” cycle between the value of datasets to firms and the value of the same to the consumer: large datasets enable superior training of machine-learning systems to extract the insights to optimally innovate, and to reach and serve consumers. As a result of improved service, more consumers provide further data as they consume, and so the cycle continues.
A central concern then hinges on whether the firm may reach a critical “tipping point” where competitors may not be able to keep up (it can occur in all markets, but may be exacerbated in the case of data-intensive markets).
What can be learnt from the 2014 Facebook and WhatsApp merger? In this $19bn transaction, Facebook was defined as a provider of websites and applications for mobile devices, offering social networking, consumer communications and photo/video sharing functionalities via its platforms. Facebook was also understood to offer advertising space.
WhatsApp was defined as a provider of consumer communications services via its mobile applications (apps). Following on from this, the European Commission (EC) determined that the main market of interest was that for “consumer communications apps for smartphones”. As “social networking services” and “online advertising services” presented no overlap, these were set aside.
Focusing then on the main market of interest, the EC found that the merging firms had 30%–40% market share in the region, but that “in such a dynamic context, high market shares are not necessarily indicative of market power”.
Subsequent to this, the EC focused on an assessment of closeness of competition; ease and cost of consumer switching; and barriers to entry and network effects. From this, it was found that Facebook and WhatsApp were not close competitors, that consumers can easily switch, and that barriers to entry are low.
On the latter and also relating to network effects, stakeholders did raise concerns of interoperability (the merged entity matching Facebook IDs with WhatsApp cellphone numbers), thereby leveraging off a larger user base, in turn raising barriers to entry and network effects. The EC, however, determined that this was unlikely given the technical difficulties in doing so, as stated by the merging parties.
Despite the above determination, the EU announced in 2017 that Facebook was being fined €110m for misleading regulators during the 2014 review of the WhatsApp takeover. This “misleading” pertained specifically to the fact that Facebook and WhatsApp were able to combine their data, after stating in the 2014 merger review that this was not technically possible. This constraint had a strong influence over the merger approval at the time (via the stated assessments of barriers to entry and network effects in each of the markets of interest) and therefore raised a hefty fine.
This highlights that a careful effects-based approach is required in assessing mergers, and in particular mergers involving a large amount of data, taking into account all practical impacts on competition and consumers. Indeed, in the Facebook and WhatsApp merger this was the approach taken by the EC, but perhaps not fully considered by the merging parties.
It is credible that the merging parties would still have wanted to merge even if there was no possibility of integrating their systems (given that there was already multi-homing and hence overlap, and because each business was expected to be profitable on its own), but if the ability to integrate had at the time of the merger been more clearly raised, this may have “saved” them a fine. This is particularly so since the EC did include an “even if” assessment in its analysis, pertaining to the possibility of technical integration.
A final point of discussion pertains to where competition and regulation should meet in this space. If well-enforced regulation controls what firms can and cannot do with users’ data, this may mitigate some of the competition concerns. For example, WhatsApp data could have been stipulated as not being usable beyond the purposes of what users sign up for, thereby mitigating concerns of Facebook leveraging off this in any integration of systems that would provide unfair network effects. Of course, this would need to be alongside alternatives being available for users who may prefer to switch in the case of being unsatisfied with updated and notified legalities of data usage.
Looking forward, these points are expected to be relevant locally, especially as we have already seen many mergers in sectors where data (particularly old or existing data, relative or in addition to new data) are a key asset relevant to the transaction.
Understanding the relevance of data in merger transactions may become increasingly important in assessing the expected effects of those transactions for consumers. This will be an exciting space to watch in 2019, both locally and globally.
• Redpath is a competition economist.