The Tryst of the Titans: An Analysis of the Facebook-Jio Deal
Updated: May 24, 2020
Authors: Ojasvi Mishra & Sakshi Lulla
The authors are students at the Institute of Law, Nirma University, Ahmadabad
India is undergoing one of the world's most complex social and economic transitions, driven by the rapid adoption of digital technologies. In the midst of this growth, Reliance Industries puts its trump-card on the table, with the introduction of Jio, which today created its own streaming media empire. At such a time when most Indian telecom companies are struggling against huge debts and prolonged losses, world’s largest social media company Facebook announced a deal with the Mukesh Ambani-owned Reliance Jio for purchasing a 9.99% stake in RIL's telecom unit, with a huge Rs 43,574 crore investment.
While the deal has been announced, it cannot come into effect until it receives the final nod from the country’s competition law watchdog, the Competition Commission of India (CCI). Section 6 of the Indian Competition Act prohibits all such combinations which are likely to cause an appreciable adverse effect on competition (AAEC) within the relevant market(s). However, an acquisition will require such scrutiny, only if the assets and turnover of the companies explicitly fall outside the De Minimis exemption (small target threshold). Since the high asset and turnover figures of the combining companies exceed these thresholds, this deal needs to be notified to the Commission, or otherwise, it may attract a huge penalty under Section 43A, on account of gun-jumping. Moreover, bearing in mind the potential seismic effects such an acquisition might have on the competition in the Indian market, it becomes all the more important for CCI to scrutinize this deal.
The core component of CCI’s combination control regime is the ex-ante analysis of acquisition in question, to determine their possible adverse effects on competition. Section 20(4) enlists various factors that are to be considered while assessing a combination like; the existing level of competition, barriers to entry, countervailing market power, probable price increase and most importantly the chances of eliminating vigorous and effective competition. However, the CCI would allow a combination if the parties are able to establish that the benefits of the combination to the market outweigh its adverse impacts.
With more than 388 million subscribers, Jio is India's largest telecom service provider. On the other hand, Facebook has about 328 million Indian users accessing the site every month, along with more than 400 million WhatsApp users. Keeping in view the significant barriers to entry, high sunk costs and difficulty in achieving economies of scale in the market, with these titans coming together there are huge competitive concerns arising not just for telecom sector giants like Airtel but also digital market leaders like Google & Amazon, leave aside the local start-ups and SMEs.
II. Analysing the Combination: Horizontal & Vertical Aspects
Interestingly, this acquisition has an essence of both horizontal as well as a vertical combination. Although the two companies primarily operate in separate markets, vis-à-vis telecom and social media, however, they have overlapping businesses too. For instance, in the e-commerce market Reliance operates via Ajio and is soon to launch Jio-Mart. On the other hand, Facebook also has ‘Marketplace’, a digital forum where users can enter into buying and selling arrangements with others in their area. Simultaneously, “WhatsApp for Business” service enables small sellers to host their catalogue on the app as well. Also, WhatsApp-Pay that currently awaits the nod from the government, will compete with Jio-Money.
Under Section 19(4) ‘resources of the enterprise’ is one of the most important factors assessing the dominance of firms, and especially in technologically driven markets, it has been interpreted wide enough to include ‘network effects’ and control over data. At present, along with its deep pockets, Jio is already leading the telecom industry with a 32.04% market share, and Facebook is undeniably the world’s largest social media corporation. Consequently, the proposed combination will not just significantly increase the concentration in the respective horizontal markets by reducing the incentives of the two firms to compete vigorously, but also the pooled resources of the Croesus companies will add to their pre-existing dominance, especially in the telecom sector where all its competitors are under huge debts.
Looking at the vertical aspects of this combination, one of the primary concerns would be the exclusionary effect that it may entail. As both the companies operate in an inter-linked market, they will largely benefit from the network effect of the combination, as they will have access to the combined customer base of the 2 firms, thereby placing them at a significant advantage over its competitors. Reportedly, Jio Platforms, Reliance Retail and WhatsApp have also signed a commercial pact to cross-leverage e-commerce platform Jio-Mart and WhatsApp, to grow both businesses. Additionally, the companies may significantly hinder effective competition and raise barriers to entry of potential competitors in the market, by providing their respective services to other players on less favourable terms. Due to FB’s vested interests in Jio, it would have the incentive to foreclose potential competition for its companion and reap the subsequent profits. For instance, priority treatment to Reliance’s private labels such as Best Farms, Good Life, etc. on WhatsApp market platforms.
Generally, the principal objective of the combination is generating significant efficiencies in the business and both Facebook and Jio would have plenty to offer each other in this symbiotic relationship, Facebook intended to tap into India's internet market with services such as Free Basics but got snagged on net neutrality grounds. With Jio on board, they have an in-road into the Indian market's vast potential. Similarly, Jio’s collaboration with Facebook Shopping platforms as well as WhatsApp business and payment networks would be a significant growth catalyst in competing with the likes of Amazon and Flipkart in e-commerce with Jio-Mart. Therefore, with the sudden boom in e-commerce market all across the world, there is an increasing need of reliable digital payment tools, such acquisition can be a great opportunity for both the firms to communicate & locate their customer base and bolster their businesses.
However, all these efficiency justifications of the combination need to be weighed against the harm it may cause to the market. With the incentives to compete with each-other reduced due to their shared interests, any co-ordinated actions of the firms pose a serious threat to the existing & potential competition, eventually leading to a monopolisation of the market.
III. The Big Data Conundrum
Data is an essential input as the strength of any business can be determined by the variety, amount and quality of data that it holds. Both companies have gathered an unprecedented amount of data over the years. This combination will strengthen their data resource base furthermore which will take a really long time for its rivals to come close to. Availability of ‘big data’ is a significant competitive advantage to its holder as it reveals patterns of information that enable companies to understand user behaviour and preferences. Though the Indian Courts do not allow the convergence of competition and privacy laws, however, recently In Re Matrimony.com v. Google, the CCI recognized the significance of data which is taking shape of the running-fuel of the market, as it can be turned into any number of revenues generating artificial-intelligence-based innovations.
As Napoleon Bonaparte once said, “War is 90% information”, and with the data-banks of the two companies’ combined, they have all the information in the world to take down all its competitors in the market war. Thus, while assessing the deal it would be important to bear in mind that Facebook has already been held accountable by various antitrust authorities around the world for using its vast data collection to set up its position of dominance. Moreover, since WhatsApp is being used as a channel for digital commerce, there is a significant risk of the transactional details of SMEs being opened up to a foreign company.
Thus, while notifying this combination to the CCI, Facebook shall file its justifications with all alertness and err on the side of caution. This becomes essential because of the fact that the CCI has vast powers, including prohibiting such combinations or making appropriate modifications to this deal, if it is of the opinion that such combination might lead to AAEC in the market. However, if the Commission is of the opinion that the combination has the potential to cause AAEC but such effect may be neutralized by suitable modifications, it may propose some structural or behavioural remedies to the parties. Therefore, it would be really interesting to see how FB & Jio justify that the pro-competitive efficiencies of the combination outweigh the probable adverse effects, in order tilt the scale of balance in their favour get the green-chit from CCI.