This article is written by Ojasvi Mishra and Sakshi Lulla. In this article, the authors explain the deal between Facebook and Jio and the legalities relating to the same.
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 put 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.
This is the first instance where a tech corporation has invested such a quantum in a minority stake, anywhere in the world. Details of such acquisition are required to be filed in with the Commission within seven days. The deal has already been executed but it can’t come into effect until it receives the final nod from the country’s competition law watchdog CCI, especially looking at the seismic effects such an acquisition may cause in the Indian market. These high investment figures explicitly fall outside the De Minimis exemption under Section 5 of the Competition Act and thus qualify as a combination that needs CCI’s scrutiny. The core component of the Indian merger control regime is the ex-ante analysis of acquisition in question, to determine their possible adverse effects on competition.
Any combination which is likely to cause AAEC within the relevant market is restricted as per Section 6 of the Act. While assessing a combination various factors are considered like; 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, 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.
Analysing the Combination: Horizontal & Vertical Aspects
Interestingly, this acquisition has an essence of both horizontal as well as vertical combination. Although the two companies primarily operate in separate markets, vis-a-via telecom and social media, however, they have overlapping businesses too. For instance, in the e-commerce market Reliance operates via Ajio in the online space and is soon to launch Jio-Mart, Facebook also has ‘Marketplace’, a forum for buyers and sellers. Simultaneously, “WhatsApp for Business” service enables small sellers to host their catalogue on the app as well. Also, WhatsApp-Pay, that will work parallel to Jio-Money, awaits nod from the government. 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 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 the inter-linked market the network effect of the combination will not just put them at a significant advantage over its competitors, but also due to their vested interests, they would have both the ability and incentive foreclose potential competition for their companion’s market by providing their respective services to other players on less favourable terms. In addition, effective competition may be significantly impeded by raising barriers to entry to potential competitors.
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 FB Shopping platforms as well WhatsApp business and payment networks, would be significant growth catalyst in competing the likes of Amazon and Flipkart in e-commerce with Jio-Mart. Furthermore, with communities throughout the world, being in a lockdown, many entrepreneurs are in need of reliable digital tools that can be used to communicate & locate their customer base and also bolster their businesses. 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.
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 the 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. Although, the Indian Courts does not allow the convergence of competition and privacy laws, however, recently in the case of 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 whipped 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 channel for digital commerce, there is significant risk of the transactional details of SMEs being opened up to a foreign company.
Thus, while notifying this combination to the commission both the companies shall file their justifications with all alertness and err on the side of caution, as CCI has vast powers ranging from imposing penalty to the extent of making divesture if it is of the opinion that such combination might lead to Appreciable Adverse Effect on Competition 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 direct the parties to make appropriate modification to the combination. 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.
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