India: Who Will Bell The Apps?

Last Updated: 13 July 2017
Article by Modhulika Bose

How Facebook and WhatsApp won over Sections 4 and 5 of the Competition Act, 2002 in a Big Data Economy.

On 01.06.2017, the Competition Commission of India ('Commission') dismissed an abuse of dominance case against WhatsApp Inc. under Section 26(2) of the Competition Act, 2002 ('Act'), in Case No.99 of 2016. The following case comment attempts to briefly analyze this 26(2) order ('Order') and also to contextualize it against Facebook's acquisition of WhatsApp.

On 19.02.2014, Facebook Inc. announced the acquisition of WhatsApp Inc. for approximately US $19.3 billion. The acquisition was not notifiable in India as it did not trigger the asset or turnover thresholds prescribed under Section 5 of the Act. It may also be noted that the under the Act, the Commission does not have suo-motu powers to review mergers which can potentially raise AAEC concerns unless thresholds under Section 5 have been met.

The Commission got its first opportunity to study the said acquisition for its adverse effects on Competition in India when in the latter half of 2016, a Mr. Vinod Kumar Gupta('Informant')  filed an Information before the Commission  on behalf of 'Fight for Transparency Society'. The Informant alleged two separate contraventions under Section 4 of the Act. The first allegation was in relation to the post-acquisition change of WhatsApp's Privacy Policy on 25.08.2016 under which WhatsApp subscribers were to share their account details and other similar information with Facebook. The second allegation was that by becoming a free application ('app') since January 2016, WhatsApp had engaged in predatory pricing. The Informant had also alleged violations of privacy rights and the violations of provisions of the Information Technology Act, 2002 although the same were dismissed by the Commission as subject matters falling outside the purview of the Act and also because the allegations had in any case been considered by the Delhi High Court in Karmanya Singh Sarren and Other v. Union of India [W.P.(C) 7663/2016] the decision in which is currently pending in appeal before the Supreme Court.

The Commission defined the relevant market as 'the market for instant messaging services using consumer communication apps through smart phones'.  The definition adopted by the Commission is also almost identical to the narrow market definition adopted by the European Commission ('EC') its decision approving the Facebook's acquisition of WhatsApp (Approval Decision').1 However, it maybe pertinent to note that EC undertook its ultimate market analysis in three further narrower markets located within the aforesaid market definition i.e. market for consumer communication services, Social Networking Services and Online Advertising Services. These three distinct markets however were not recognized by the Commission in its Order.   

The Commission, based on the data presented by the Informant, accepted the dominant position held by WhatsApp. In this regard the Order specifically noted that 96% of the smart phone devices in India had WhastApp installed on them and that 51% and 56% of internet users in India where active on WhatsApp and Facebook respectively, everyday.

The Commission next considered the allegation pertaining to changes of the privacy policy of WhatsApp. According to the policy update on 25.08.2016 the account details of the WhatsApp subscribers, including their phone numbers were to be matched with their corresponding Facebook Accounts. Before turning to the Commission's consideration of this allegation, a brief reference maybe be had to facts that lay ground to the Informant's allegation. WhatsApp had initially been a paid service where after a free trial of 1 year, a subscriber had to pay an annual subscription fee of US $ 0.99. WhatsApp revenue was primarily dependent on such subscription fee. This revenue model is of significance as it allowed WhatsApp to provide a significantly differentiated user experience because of a "no-ads" product strategy and also freeing it from vested commercial interest in the personal data of its subscribers or the data pertaining to their activity on the app. This was unlike other free communication apps (including Facebook's Messenger) whose revenue is dependent on advertisement revenues and revenue derived from selling subscriber's data to third parties. The two revenue modes also present a clash on issue of privacy rights.

Consequently, when Facebook announced its acquisition of WhatsApp, there was immense speculation that Facebook would also be commercially exploiting the data associated with the accounts of WhatsApp's subscribers. During the EU investigation on the proposed acquisition, third parties had submitted that some form of integration of the subscribers of Facebook and WhatsApp was likely to follow the acquisition. Facebook, however, denied such a possibility on three broad grounds. Firstly, that technically, the integration of the WhatsApp profiles and Facebook profiles will not be possible. Secondly, if users are manually required to initiate the integration, the move will receive 'significant backlash' from subscribers of Facebook as well as WhatsApp. Thirdly, cross-application use by users of the two applications will be difficult as the architecture of the apps are significantly different. These submissions were prima facie accepted by the European Commission in Approval Decision.2 Most importantly, it appears from the Approval Decision that the European Commission was of the view that in any case, if privacy protections available on WhatsApp are diluted by Facebook, it would trigger a considerable switch of customers to other communication App and therefore Facebook would be averse to such a commercial risk3. The U.S. Federal Trade Commission had also notified Facebook and WhatsApp against failing to keep privacy promises made to its respective subscribers post the acquisition and that any change in privacy policy would require an 'affirmative' change from subscribers.4 In all it would be reasonable to state that at the time of acquisition of WhatsApp, Facebook and WhatsApp had created a strong perception that privacy policy of WhatsApp would not be disrupted by the acquisition.

Contrary, to this perception, on 25.08.2016, WhatsApp, brought about sweeping changes to its privacy policy5. Under the updated terms of the privacy policy, phone numbers connected the WhatsApp's accounts were shared with Facebook's systems. A consumer was simply asked to agree to the update policy by clicking on 'Agree' icon. A much smaller 'Read more' option would have taken the user to a more detailed statement of the privacy policy in which a box against 'Share my WhatsApp account information with Facebook...' had to be located and unchecked to prevent the sharing of account details with Facebook. An alternative, opt-out option was provided to users to restrict the sharing of information with Facebook by altering their account details within thirty days of agreeing to the updated policy. The policy update. Following the policy update, on 18.05.2017, the European Commission slapped a fine of € 110 Million on Facebook for misleading it during the investigation leading to the Approval Decision as it was held that during the 2014 investigation the staff at Facebook was aware of possibility that WhatsApp and Facebook accounts would be matched in an automated manner6.

In March 2014, the German competition authority had initiated a probe against Facebook's suspected abuse of market power vis-a-vis the data of its subscribers. Following the policy update, in September 2016, Germany also imposed a ban on transfer of data between WhatsApp and Facebook7. Last month the Italian Competition regulator also imposed a fine of €3 miillion on WhatsApp for the u-turn on its privacy policy and 'inducing' its subscribers for sharing their data with Facebook 8. Further, several other proceedings were instituted by EU's data regulators against Facebook and WhatsApp for violation of data protection laws.

It was against this background that the Commission was considering the Informant's case. The Commission dismissed the allegation by accepting three principal submissions made by WhatsApp. Firstly, that subscribers were given an 'opt out' option to restrict the sharing of their information with Facebook. Secondly, that intent of sharing information with the Facebook family of companies was to improve the architecture of WhatsApp and Facebook so as to increase efficiency and safety. And that due to the end-to-end encryption of data on WhatsApp, content shared over WhatsApp is protected and cannot be accessed by a third party. The author is of the view that the submissions admitted by the Commission as a defence to the allegation circumvents the allegation rather than counter it. It is submitted that WhatsApp's u-turn on privacy policy appears to have been implemented with some impunity which in itself may, prima facie, be indicative of its market power. The allegation was not merely regarding protection of the data shared over WhatsApp but whether while agreeing to subject one self to the updated policy, the subscriber was given an opportunity to make an informed choice. 

In recent times authorities have merely considered privacy concerns as non-price factors in competition assessments.9 This is mainly because data in the hands of individual user is never assigned a monetary value but is seen in isolation within the privacy discourse. This, however, is the age of big data where an individual's phone numbers and their connections on a social platform are not merely a subject matter of privacy but a 'commodity' that is bought and sold and serves as currency in the digital market. Viewed from this perspective, where an admittedly dominant players fails to provide sufficient opportunity and knowledge to its input suppliers (i.e. subscriber with their personal data), it may amount to a violation under Section 42(a), Section 4(2)(d) and Section 2(2)(e) of the Act.

With regard to the allegation of predatory pricing, the Commission dismissed the same claiming that that there were several other apps such as Hike, Messenger and Viber that are also available for free and that not charging any fee for subscription fee was a standard industry practice in the relevant market. To further justify its decision the Commission also considered the 'switching cost' in the relevant market. The Commission held that since most of the other communication apps were low cost/free, easily downloadable, capable of co-existing on the same device, had  functionally simple interfaces, and there was enough information available about new apps on app stores, the switching costs for a consumer in the relevant market was insignificant.

This analysis is problematic for two reasons. Firstly, it is oddly and tediously entwined with the issue of predatory pricing while it could have more appropriately been a component of the Commission's  assessment on dominance. Further, ease of switching could also make predatory pricing a much more aggressive anti-competitive tool. Secondly, the switching cost assessment undertaken by Commission is potentially deceptive as it is more suited for the analysis of traditional goods and services rather than internet based, data-intensive service. For example the Commission has not taken into consideration the 'network effect' i.e. just like traditional telecom services, communication and social network  platforms also become more valuable as more and more subscribers use it. As had been recorded in the Order itself 96% percent of the smartphones in India have WhatsApp installed on them and 56% users are active on WhatsApp everyday. These figures are significant enough to suggest that consumers are unlikely to leave the app when more that half of their acquaintances are likely to be available on that platform. Further with volume of multimedia content and messages being shared through the app, shifting to another app may entail the cost/effort of data migration which will further have 'lock-in' effect on a subscriber, especially when the app itself is free further disincentivizing a shift10. Infact these two considerations received substantial considered by the European Commission and although it did not see competition being distorted in the post-acquisition market, that conclusion was drawn on market studies conducted within the European Commission and results of which may be drastically different in India.

The ultimate decision reached by the Commission may not have changed had it considered the factors discussed above, but to inspire confidence that the Commission is well equipped to assess cases of dominance in today's digital economy, efforts should be made to look at such cases in a much more nuanced manner so as to capture the on-going concerns about digital monopolies that are readily being treated as standards of competition assessments in other jurisdictions. Though the Commission decided not to subject the Facebook's conduct to a competition assessment, the current appeal before Supreme Court where the changes in the Privacy policy of WhatsApp is currently under challenge, the dominant position of Facebook and WhatsApp is most likely to be considered and it will be interesting to note the position the Hon'ble Court takes on this controversy.11

Footnotes

1 Case No. Comp/M7217, decision dated 3.10.2014 ('Acquisition Approval')

2 Approval Decisions- See paragraphs 137 and 138 and paragraphs 184 to 186 of the decision.

3 Approval Decision- Para 174

4 FTC, Press Release 'FTC Notifies Facebook, WhatsApp of Privacy Obligations in Light of Proposed Acquisition' dated 10.04.2014, available at https://www.ftc.gov/news-events/press-releases/2014/04/ftc-notifies-facebook-whatsapp-privacy-obligations-light-proposed

5 See: WhatsApp Blog, 'Looking ahead for WhatsApp' dated 26.08.2016,  available at: https://blog.whatsapp.com/10000627/Looking-ahead-for-WhatsApp ;

6   European Commission – Press Release 'Mergers: Commission fines Facebook €110 million for providing misleading information about WhatsApp takeover' dated 18.05.2017, available at  http://europa.eu/rapid/press-release_IP-17-1369_en.htm

7 See: IANS, 'Ban on WhatsApp data transfer to Facebook to stay: German court', Business Standard, dated 27.04.2017, available at :  http://www.business-standard.com/article/news-ians/ban-on-whatsapp-data-transfer-to-facebook-to-stay-german-court-117042700309_1.html   ; Karin Matussek , 'WhatsApp sued by German Consumer Group Data Policy', Bloomberg, dated 30.01.2017, available at  https://www.bloomberg.com/news/articles/2017-01-30/whatsapp-sued-by-german-consumer-association-over-data-policy-iyk1690m

8 Nick Fildes & James Politi 'WhatsApp fined €3m over Facebook data sharing in Italy', Financial Times , dated 13.05.2017  https://www.ft.com/content/2fdb5f34-3728-11e7-bce4-9023f8c0fd2e

9   Edith Ramirez, FTC Chairwoman, 'Deconstructing the Antitrust Implications of Big Data', Keynote Remarks at the 43rd Annual Conference on International Antitrust Law and Policy Fordham Competition Law Institute New York. dated 22.10.2016, available at : https://www.ftc.gov/system/files/documents/public_statements/1000913/ramirez_fordham_speech_2016.pdf

10 Approval Decision , para 114.

11 Karmanya Singh Sareen v. Union of India [SLP(C) No. 000804 / 2017]  

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