Page 1

This article was first published on LexisPSL Competition on 11 March 2014. Click here for a free 24h trial of LexisPSL.

WhatsUp with Facebook/WhatsApp?

11/03/2014

Competition analysis: Does the Facebook/WhatsApp merger raise competition concerns? Duncan Liddell, a partner in the competition and EU law department at Ashurst in London, looks at the rationale behind the merger and its potential impact on the technology markets.

What is the background to this transaction, and what is Facebook's rationale for making such an costly purchase?
There were rumours that Facebook was interested in acquiring WhatsApp back in 2012, although this was denied by the companies at the time. Since then WhatsApp has achieved huge growth in user numbers--during a conference call with analysts after the announcement of the deal David Ebersman (Facebook CFO) stated that just four years after launch WhatsApp has 450 million active users worldwide and is adding one million users every day. However, the rationale for the deal is clearly not the revenue generated by WhatsApp under its current revenue model (users only pay $1 a year after a year's free initial use). There has been a lot of speculation as to what Facebook's rationale is, but the most likely reasons are that this is a strategic decision to purchase a competitor in the mobile messaging market, to expand Facebook's mobile presence (particularly in Europe and developing countries) and, potentially, to provide an additional data source for Facebook's core advertising business (although this is something which has been publicly denied). Developing a strong mobile presence has become increasingly important to Facebook, as seen in its acquisitions of Instagram (mobile photo sharing), Lightbox (mobile photo sharing) and Onavo (mobile analytics). Speaking at the recent Mobile World Congress in Barcelona, Mark Zuckerberg also commented that there is an 'inherent value' in any service with over a billion users (which WhatsApp is expected to achieve within the next five years).

Are there any overlaps in the parties' activities?

Page 2

The parties overlap in the provision of mobile messaging services--Facebook launched its own Facebook Messenger App in 2011--although Facebook messages tend not to be used in 'real time' in the same way as WhatsApp messages.

In your view, does the proposed transaction raise competition concerns and, if so, what points will the parties make in defence of the merger?
WhatsApp and Facebook are both clearly important players in the mobile messaging market. In the conference call with analysts, referred to above, Mark Zuckerberg described WhatsApp as the 'clear global leader' in mobile messaging services. However, the market as a whole is still fragmented, with a lot of other competing services on offer (in particular in Asia, where WeChat, KakoTalk and Line are far more popular than WhatsApp or Facebook Messenger). In addition, the speed with which new services have been launched, and the rapid growth seen by some of those services, suggest that there are currently low barriers to entry for new providers. A good example is Viber (recently acquired by Japan's Rakuten), which reported one million users in the first three days following its launch in December 2010, 15 million users within five months, and 300 million users by early 2014. Furthermore, even if the merger were considered to result in the creation of a large market share on the basis of a narrowly-defined market, competition regulators tend to be less concerned about the creation of large market shares in fast-moving technology markets. With regard to possible network effects, it is certainly true that the more users a messaging service provider has, the better its chances of expanding its user base--a user of a particular service can usually only use the service to message other users of the same service, so a large user base increases the attraction of the service to new users leading to a virtuous circle. However, in the context of mobile communications, the European Commission has previously observed (in COMP/M 6281 Microsoft/Skype) that network effects tend to be mitigated by the fact that most users tend to communicate with a small 'inner circle', and it is not difficult for these groups to move between different service providers. Furthermore, there tends to be at least some degree of 'multihoming' ie using more than one provider, which also lessens any network effects. A greater potential concern is the suggestion that Facebook has acquired WhatsApp for strategic reasons to eliminate a potential competitor which it perceived as a threat due to the rapid growth of its user base. While such concerns could be investigated in the context of a merger review, and a merger authority would be very interested in reviewing documents that set out the rationale for the transaction, such concerns are more typically investigated under provisions relating to abuse of dominance. For example, the European Commission issued a statement of objections to Les Laboratoires Servier in July 2012 regarding alleged abuse of a dominant position by systematically buying up technology required by competitors to produce generic versions of certain drugs, in order to restrict competition (the investigation remains ongoing).

Page 3

How do competition regulators approach merger investigations in fast-moving technology markets?

Competition regulators have so far been cautious about intervening in fast-moving technology markets. As already mentioned, the creation of large market shares (even as high as 75-80%) have previously not been viewed as a cause for concern in these markets due to the dynamic nature of the markets and the speed with which market shares can change significantly. This is particularly the case in markets in which there are very low barriers to entry and opportunities for innovative new entrants to gain market share very quickly--see for example the European Commission's decisions in COMP/M 6281 Microsoft/Skype and COMP/M 6690 Syniverse/MACH.

Is the European Commission likely to have jurisdiction to review this transaction-noting that Facebook's purchase of Instagram was vetted at the member state level in Europe?
It is unclear whether the European Commission will have jurisdiction to review this transaction. In order for this to be the case, either:

o o o

WhatsApp's turnover in the EU will need to be in excess of EUR 250m, or WhatsApp's turnover in the EU will need to be at least EUR 100m, with turnover of at least EUR 25m in each of at least three individual member states, or those EU turnover thresholds are not satisfied but the transaction is caught by at least three national merger control regimes of EU member states and there is a 'reference up' to the European Commission at the request of the parties under Council Regulation (EC) No 139/2004, art 4(5) (the EU Merger Regulation)--which may be the case where the parties would rather deal with the European Commission than a number of national authorities, or the EU turnover thresholds are not met but one or more EU member state merger control authorities request that the European Commission reviews the transaction pursuant to the EU Merger Regulation, art 22--which may be the case where a member state authority considers that the case raises issues beyond just that member state

There is very limited publicly available data about WhatsApp's revenues and its geographic breakdown. It appears that roughly half of WhatsApp's current active users may have been using the service for more than a year, which would suggest worldwide revenues of around EUR 162m (based on $1.00 revenue per year per user). However, much lower estimates have been given by analysts commenting on the deal--for example, an analyst at Hudson Square Research in New York recently estimated WhatsApp's 2013 revenue to be as low as EUR 14.5m. It is not clear what proportion of revenue is generated by users in the EU, although data published by Onavo (prior to its acquisition by Facebook) indicated that in 2012 WhatsApp had significant market shares in most EU member states, including around 80-90% of iPhone users in Germany, Spain and the Netherlands.

Page 4

On the basis of the above it seems unlikely (although not completely impossible) that WhatsApp's turnover will satisfy the jurisdictional thresholds of the EU Merger Regulation. It is however possible that the national merger control thresholds may be met in a number of individual EU member states (either on the basis of turnover or share of supply), such that the transaction may be referred up to the European Commission, either by the parties or by a member state authority.

Given other recent acquisitions (eg Facebook's acquisition of Instagram), is there the possibility that the industry is consolidating around a small number of big players?
It has been suggested that part of Facebook's rationale for acquiring WhatsApp (and other recent acquisitions) is a desire to become a social media conglomerate. However, the sector remains very dynamic and up until now has been constantly evolving. Users have also shown themselves to have limited long-term loyalty and have been prepared to move from established providers to new services very quickly--in which event the virtuous circle becomes a vicious circle with share being lost rapidly. It therefore remains to be seen whether the current large players such as Facebook can achieve long-lasting successful consolidation. Duncan Liddell specialises in all aspects of UK and EU competition law. He has considerable experience in dealing with the European Commission, UK regulators and antitrust authorities in other jurisdictions in relation to both merger control and the application of competition law to a wide range of commercial agreements and practices. In addition, he has specialist knowledge of the media sector having spent nearly three years as an in-house regulatory advisor. Duncan would like to thank Ruth Sander, a professional development lawyer at the firm, for her input. Interviewed by Kate Beaumont. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.