EU Commission approves Facebook’s acquisition of WhatsApp

By Anthony Bochon

On 3 October 2014, the European Commission of the European Union (the “Commission”) approved the acquisition without any commitments. After the approval of the acquisition of Skype by Microsoft in 2011  and of the acquisition of Nokia by the latter in 2013, this was another occasion for the European Commission to examine competition issues in the consumer communications services sector. It merely confirmed its approach adopted in the Microsoft / Skype case, which was endorsed by the General Court in the Cisco Systems Inc. judgment of 11 December 2013.

As a preliminary remark, it must be pointed out that the acquisition project was notified to the European Commission on the ground that the national competition authorities of at least 3 EU member States would be competent to review this acquisition. In principle, filings are made with the Commission because the two undertakings involved in the operation have a turnover that exceeded the notification threshold. However, Article 4 (5) of Regulation 800/2004 (the “Merger Regulation”) provides that any concentration subject to the review of at least three national competition authorities can instead be examined by the European Commission.

A product market definition left open

The Commission first determined that the acquisition concerned consumer communications services which have the double characteristic of allowing users to communicate in real time and which are used to communicate with relatives, friends and other contacts.

The Commission immediately drew a distinction with the professional communication services, as it does with other product markets where the professional-consumer dichotomy still has some significance. In the present case, the Commission’s approach could be considered surprising because most current communication services indistinctively provide the same functionalities to any type of user and professional users could, at least, use WhatsApp for professional purposes. This would be less true for Facebook which was, at first, a social media allowing alumni of universities to keep or get back in touch.

The Commission then decided to segment the market concerned by platforms, as WhatsApp is only available on smartphones and did not have any plan to be available on other platforms such as personal computers where Facebook is already available. The relevant product market was therefore defined as only including consumer communications apps for smartphones.

The Commission considered the issue of whether traditional electronic communication services such as voice calls, SMS, MMS and e-mails should be included in the relevant product market. The Commission’s findings that substitutability or complementarity between the traditional and the new electronic communications was imperfect were solely speculative. Indeed, the Commission concluded that the inclusion of traditional electronic communication services in the relevant product market would dramatically decrease the market share of Facebook and WhatsApp. As a result, the Commission decided to leave the exact product market definition open, because the acquisition did not raise any concern as to its effects on competition, irrespective of the product market definition.

Plenty of smartphone apps in the European Union

The Commission considered that the regulatory environment of telecommunications in the European Union could, unlike the United States, explain the diversity of smartphone applications. Indeed, the application of roaming and international call charges – despite their decrease over the last decade due to several legislative interventions of the EU institutions – is an incentive for EU consumers to use smartphone apps to communicate rather than via their mobile voice telephony or traditional messaging services. Despite the fact that WhatsApp is subject to subscription fees in some member States and not in others, the Commission was of the opinion that there is no national market and that the geographic market should be European Economic Area wide.

Differences between social networks and consumer communication services

The Commission did not want to define any further the social networking product market suggested by Facebook as being its relevant market, since the acquisition did not raise any concern. The Commission took the view that the consumer communication services market should remain the relevant definition for the purpose of the investigation. It however identified notable differences between Facebook and WhatsApp.

The Commission considered that the user’s experience on Facebook is not the same as a WhatsApp user: a Facebook user can communicate to a wider audience and also the rhythm of communication is dissimilar because the comments function on Facebook allows users to respond long after an initial message has been posted. WhatsApp is rather an advanced form of messaging service similar to SMS or MMS. The existence of a messaging service for Facebook – the so-called “Facebook Messenger” – did not retain the Commission’s attention. The market investigation showed there was a strong interchangeability between messaging services and that most of the WhatsApp users were already Facebook users.

The issue of advertising in the social media

Facebook provides online advertising services, but not on its Facebook Messenger app. The users’ data is currently neither sold nor subject to data analytic services. WhatsApp does not allow any space for advertising. As there was no competition concern, Commission did not consider as necessary to define any further the online advertising product market to know whether advertising on social networking websites has distinctive characteristics. The Commission merely confirmed its findings in the Google / DoubleClick and Microsoft / Yahoo ! Search Business decisions. The prospective analysis of the Commission also showed that Facebook was a minor player among the users’ data collectors with a market share around 6%.

Drivers of competitive interaction between consumer communications apps

The functionalities offered and the underlying network have been identified as the main drivers of competitive interaction between consumer communication apps. In addition, the Commission took into account non-technical factors such as the perceived trendiness and coolness amongst groups of users. Furthermore, the users’ price sensitivity has been confirmed during the investigation, as almost all apps do not charge any fee for their use while others only charge a small amount of money.

Market shares and innovation cycles : Microsoft / Skype confirmed

The highest combined market share of Facebook and WhatsApp for social media messaging services would amount to 40%. The Commission concludes at paragraph 99 of its decision that “Even if the data provided by the Parties were to underestimate the Parties’ combined market shares, the Commission notes that the consumer communications sector is a recent and fast-growing sector which is characterised by frequent market entry and short innovation cycles in which large market shares may turn out to be ephemeral. In such a dynamic context, the Commission takes the view that in this market high market shares are not necessarily indicative of market power and, therefore, of lasting damage to competition.”

The Commission underlines that the sector is characterized by short innovation cycles and relies therefore on the assumption that market shares could be ephemeral. The Commission thereby confirms its approach already adopted in its decision of 7 October 2011 authorizing the acquisition of Skype by Microsoft (case M.6281) where, despite of the high percentage of combined market shares, it approved the acquisition for the same reasons. This justification was also endorsed by the General Court of the European Union which dismissed on 11 December 2013 the appeal brought by Cisco Systems Inc. against the Commission’s decision approving the Microsoft/Skype acquisition (case T-79/12) (see Newsletter 5-6/2013, p. 7).

The General Court said at paragraph 69 of the judgment that “[…] the consumer communications sector is a recent and fast‑growing sector which is characterised by short innovation cycles in which large market shares may turn out to be ephemeral. In such a dynamic context, high market shares are not necessarily indicative of market power and, therefore, of lasting damage to competition which Regulation No 139/2004 seeks to prevent.” Almost all these words have been used by the Commission to justify the acquisition of WhatsApp by Facebook. The General Court’s conclusion at paragraph 74 of the Cisco Systems Inc. judgment definitely legitimized the Commission’s reasoning: “It follows that the very high market shares and very high degree of concentration on the narrow market, to which the Commission referred merely as a basis for its analysis, are not indicative of a degree of market power which would enable the new entity to significantly impede effective competition in the internal market.”

This new decision approving an acquisition in a recent information technology sector confirms that the Commission would adopt the same pro-acquisition approach if other acquisitions in recent new technologies sectors would occur, because the short innovation cycle argument is transposable to other sectors, provided that the innovation cycle is short and the sector is too recent to base the economic assessment on data showing the market trends and market shares evolution.

After a comparison of the functionalities of the two instant messaging services, the Commission concluded that Facebook Messenger and WhatsApp were not close competitors and that, with the exception of network effects, users could still switch providers in the market for consumer communications apps.

No IP or interoperability issues

The Commission also concluded that there were neither intellectual property nor interoperability issues. Only Facebook owns some patents on messaging technologies which were irrelevant in terms of standardization. Furthermore, both apps were not pre-installed on smartphones and their downloading did not prevent users from using apps from competitors.

Conclusion

This Commission decision is in line with the decision in Microsoft/Skype and paves the way for future favorable approvals of acquisitions in the emerging technologies sector, as the Commission’s assumption that short cycles of innovation exacerbate the instability of market shares can be used as a justification for acquisitions as long as the technologies can be developed by competitors and new entrants on the market.

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