Blog > Predicting Innovation: Why Facebook/WhatsApp Merger Flunked

By Hasan Basri Cifci[1]

In the world of 2014, the Commission of Facebook/WhatsApp merger case[2] concluded that integration and interoperation of Facebook and WhatsApp were unfeasible. However, Facebook integrated its three subsidiaries (WhatsApp, Instagram, and Facebook) under its brand in 2019 and declared its plan to integrate their real-time messaging services. The Commission also concluded that integrating WhatsApp and Facebook and introducing online advertisements in WhatsApp would cause a change in the privacy policy of WhatsApp, which would be detrimental for user numbers. However, WhatsApp changed its privacy policy and shared data with Facebook in 2019 (the scope extended in 2021); and declared its plan to provide online advertisements in status function. Both changes did not significantly affect the number of WhatsApp users.[3] Last, the Commission did not consider that the collected data of WhatsApp might have a strengthening influence on Facebook’s market power. But such power became visible and raised serious concerns regarding the right to privacy today. Thus, all predictions that the Commission made melted away. Why?

Innovation was underestimated

Digital markets are markets where competitors compete not only in products but also in innovation. “Competition in innovation” is recognized under US Horizontal Merger Guidelines in 2010 and reflected in the EU merger system in 2011.[4] However, ex-ante merger control imposes a snapshot of technology in a certain period of dynamic market structure. Investigation of research and development processes when assessing post-transaction effects may ease to make better predictions.[5] In 2014, Facebook and WhatsApp were competitors who competed in innovation through their research and development processes. The Commission relied on the business plans of Facebook and WhatsApp, and that was misleading. Instead, the Commission should have given more attention to the dynamic nature of market structure and investigate the research and development agenda of Facebook and WhatsApp to illustrate their innovative behaviour.

Deviance in consumer behaviour had a lack of predictability

Digital markets are markets where competitors compete not only over products but also over privacy. Since having different privacy policies affects the value and preferability of the product, privacy is considered as a competitive determinant.[6] The Commission left concerns about privacy to the privacy-related control mechanisms, but firmly mentioned that change in privacy policy would not be the case for WhatsApp and Facebook since it was detrimental for user preferences. However, as mentioned above, changes in privacy policy did not significantly affect the number of WhatsApp users.[7] So, consumer behaviour may not progress as predicted, and deviances in consumer behaviour may restrict the extent of the possibility to predict post-transaction effects in digital markets. Then, it is a matter of whether the Commission could predict these deviances, even if privacy is accepted as a competition parameter.

In the Apple/Shazam case, the Commission analysed different datasets regarding consumer behaviour to have a comprehensive assessment of Shazam as a platform that directs personalised suggestions for its users.[8] The Commission also conducted a market investigation which comprises “licensing of music charts data at worldwide level”.[9]  So, the predictions based on datasets in the Apple/Shazam case were stronger, but not enough. Establishment of structural presumptions by case law regarding consumer responses and allowing competitors to present evidence that their case represents an exception of such presumption may be a suitable solution.[10] Though, in the Facebook/WhatsApp case, the Commission did not even touch upon what the potential changes in privacy policies were and how these changes would affect consumer behaviour.

Hierarchy in technological information was driven to misguide

The Commission relied on the technological information provided by Facebook itself, who was in the applicant position and asked for clearance. As its false-colour appeared after the decision, Facebook had misinformed the Commission regarding the potential integration and interoperability of Facebook and WhatsApp.[11] It is an example of an informational hierarchy between decision-makers in merger control and digital market companies. Since digital markets have an innovative and less predictable structure, experts in competition law may have difficulty in having comprehensive knowledge when compared to actual players. This hierarchy of information between them may restrict the extent of the possibility to predict post-transaction effects in digital markets. So, powerful evidence and diverse views may increase the quality of market investigation regarding technology in question and its potential developments.[12] In the Microsoft/GitHub case, the Commission made the same mistake when deciding that Microsoft would not prevent competition by opting to “refuse or degrade access to GitHub’s data”,[13] by relying on the current technological ability of Microsoft and business plans which had been produced by Microsoft itself.[14]

However, it is difficult to say that the Commission deserves all the blame because failures in prediction are natural byproducts of digital markets. The obscurity increases while the innovative nature of the market increases. But merger control functions better when the obscurity decreases. So, in digital markets, ex-ante merger control may lose its determinative power if it does not employ better methods to fight against such sightlessness. The Commission may consider innovation as an additional parameter of competition in relevant markets, rely on research and development agendas of the parties, employ alternative methods as innovative as digital markets, ask stronger evidence from the parties regarding demand-side responses, consider not only claims of the parties but also various sources of evidence, such as datasets, exchange of views regarding the technology in question.

---