The media sector has seen an extraordinary decade of significant transformation driven, in particular, by digitisation and technological convergence. These changes have led to the emergence and success of new business models and additional ways to broadcast and consume content.
Technological changes in the media industry have generated new competition law concerns. Most notably, the European Commission (the Commission) has been confronted with a new type of undertaking: the social media company.
First, in 2014, the Commission authorised the acquisition of WhatsApp, a provider of consumer communication services, by Facebook, which offers social networking consumer communications and photo or video sharing functionalities.2 More recently, in December 2016, the Commission conditionally cleared the acquisition of the professional social network LinkedIn by Microsoft.3
Because of the specific conditions prevailing in such high-technology markets and in the related relevant markets, these mergers have forced the Commission to adopt new standards and methods, both in defining the relevant markets and in assessing the potential effects of mergers on these new markets.
This chapter summarises the Commission's approach in the social media sector.
ii THE IDENTIFICATION OF NEW PRODUCT MARKETS
The mergers of social media companies have involved the delineation of various new markets, including the market for social networking services (professional or not), and the market for online communication services.
i Online communication services
According to the Commission: 'Online communications services are multimedia communications solutions that allow people to communicate by means of an application or software in real time. They can be distinguished between consumer and enterprise communications services. Consumer communications services enable people to reach out to their friends, family members and other contacts in real time. Enterprise communications services are used by companies for business and professional purposes'4.
Following a consistent approach, adopted in Microsoft/Skype,5 Microsoft/Nokia6 and then in Facebook/WhatsApp,7 the Commission confirmed in Microsoft/LinkedIn8 that consumer communications services should be viewed as a separate product market from enterprise communications services. This distinction was notably based on the fact that enterprise communications services are more sophisticated and reliable than consumer communications services. Enterprises have different and higher service requirements, such as robustness, security, reliability, ancillary functionality, management and support. The Commission further noted that enterprise communications services offer additional features in terms of collaborating tools, such as the possibility of sharing and editing a document in real time from different places. However, in all those merger control decisions, the Commission left open the question as to whether these markets should be further segmented depending on platforms, operating systems or functions.
From a geographic viewpoint, in Facebook/WhatsApp the Commission considered that the market for consumer communications applications was likely worldwide in scope, but defined it as EEA-wide, in line with a more conservative approach. This conservative approach was confirmed in Microsoft/LinkedIn.9
ii Social networking services
Social networking services, among which Facebook is the model, are multi-sided platforms that enable users to connect, share and communicate with each other across multiple devices (mobile and desktop) and means (e.g., via chats, posts, videos, recommendations). Such services are used to build social relations among people who share similar personal and career interests, activities, backgrounds or real-life connections. Among these services, a sub-set is focused on connecting with professional contacts. For this type of service, LinkedIn is currently the model.
In Microsoft/LinkedIn, despite the arguments put forward by the notifying parties, the Commission established a clear distinction between the social networking services (such as Facebook) and the professional networking services (such as LinkedIn). Based on the market investigation, the Commission considered that these two types of services constitute separate product markets, given their different functions, features and usage.10
Regarding the geographic market, the Commission considered in Facebook/WhatsApp that social networking services are commonly available worldwide, given the global scope of the internet. However, the Commission concluded that while there were indications that the geographic scope of the market could be global, the relevant geographic market should be limited to the EEA, in line with a more conservative approach.11
With respect to the professional networking services, the Commission, however, reached a different conclusion. Indeed, in Microsoft/LinkedIn, the Commission noted that the differences in terms of language, functions, legal and regulatory requirements, and customers' preferences among EEA countries appeared to be relevant and could influence the geographic scope of their activities. The Commission, therefore, concluded that the market of professional social services was national in scope.12
iii THE COMPETiTiVE ASSESSMENT: new challenges
The markets encompassed by social media mergers can be referred to as high-technology markets. These new markets present a new challenge for the Commission, which is faced with transactions between companies, the activity of which is unknown to them, and which require specific treatment.
i The question of the relevance of the EU merger control thresholds
One potential issue with these relatively new markets is that some companies that have a high transaction value do not initially generate any turnover. This lack of revenue implies that competition regulators may not have jurisdiction to review the transaction since the turnover thresholds will not be triggered. Consequently, there is a risk that regulators could be prevented from reviewing mergers that may in fact negatively impact the market. For instance, in Facebook/Instagram,13 Instagram had not generated any revenue at the time of its acquisition by Facebook, although it was highly valued by Facebook. The UK Office of Federal Trade was only able to claim jurisdiction over this merger under its 'share of supply' test (a test that is similar to a market share test), but not under a turnover test. Therefore, in jurisdictions where merger control is based solely on revenue thresholds, such acquisitions may not be subject to review.
ii The market power: a renewed analysis
Second and most importantly, these high-technology markets are characterised by constant innovation. In these markets, products have short life cycles, and companies are forced to remain innovative if they wish to 'stay in the game'.
In social media markets, the most innovative companies usually release an 'innovative' product or service, which itself creates a new market or a new segment, in which the company is 'dominant', at least for a certain period after releasing the product or service. In addition, barriers to entry are usually low, mostly because high-technology markets (and especially markets involved in the provision of social media services) involve intangible goods. Therefore, fixed-costs are usually constant and variable costs are low, since intangible goods 'can be replicated at virtually no cost'.14 In such fast-paced markets, establishing and evaluating market power is a difficult task for the Commission. The tendency to rely on market shares becomes inappropriate, because in markets with constant evolution, a dominant market player may rapidly see its market shares evaporate.
Consequently, in recent decisions involving high-technology markets, the Commission concluded that in such dynamic markets, market shares were barely indicative of market power.
In Microsoft/Skype, a major case involving the market for consumer communication services, the Commission indicated that 'market shares only provide a limited indication of competitive strength in the consumer communication services markets … consumer communication services are a nascent and dynamic sector and market shares can change quickly within a short period of time'.15 This analysis was further confirmed by the General Court.16
Similarly, in Facebook/WhatsApp, the Commission noted 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'.17
In addition to the issue of market power assessment and market definition, a series of new problematics are at stake in the assessment of social media mergers. We will focus on two of them: first, the specificity of 'networks effects' and second, the issue of 'big data' and its relevance in media mergers.
iii Network effects
Network effects occur when the value of a product or service for a customer increases when the number of other customers also using it increases.18 Although network effects are not prima facie indicative of a competition problem, they may nevertheless raise competition concerns if they allow the merged entity to foreclose competitors and make it more difficult for competing providers to expand their customer base, basically by creating a major barrier to entry.
In this context, in Microsoft/LinkedIn, the Commission considered that network effects created a competition problem, as they could strengthen the foreclosure of competing providers of PSN services that currently existed in certain countries. Indeed, because the number of LinkedIn members could grow, additional users would be tempted to join the network and consequently, fewer users may be induced to join competing PSN service providers. In addition, the Commission considered that such network effects may not be compensated by 'multi-homing' (i.e., the fact that users could be active on multiple services and not just LinkedIn), because users of PSNs usually 'curate and update their profiles' and build relationships on them. This means that using multiple networks would require them to reinvest time into creating and updating a new profile. These investments disincentivise users from multi-homing between PSNs.19
To the contrary, in the market for consumer communications, the Commission considered in Facebook/WhatsApp that network effects were compensated by multi-homing. Indeed, using a communication service does not require any investment, and consumers usually use multiple messaging apps such as Messenger, WhatsApp, iMessage etc. Moreover, the Commission considered that network effects were compensated by the fact that consumer communication apps were a fast-moving sector with low barriers to entry as well as low switching costs for consumers.20
iv Big data issues
Big data (i.e., large datasets collected and used by companies) has been at the centre of the economic and antitrust debate in the recent years. Although it has not been dealt with in any antitrust cases yet, big data is always involved in social media mergers. Consequently, the Commission incorporated big data analysis in merger assessments both in Facebook/WhatsApp and in Microsoft/LinkedIn.
Data constitute valuable assets for companies, as well as an essential input factor for many online services. In the market for online advertising, the collection of data is fundamental, as it allows internet search providers to provide their users with more targeted advertising, thus increasing monetisation opportunities. Therefore, the concentration of data within a single company may distort competition, and therefore needs to be carefully considered in merger decisions.21
In this context, European Commission Information, Communication and Media director Guillaume Loriot recently stated that competition policy must not discourage the use of big data, but must 'carefully' assess it in merger control. In his opinion, the Commission needs to 'go into the incentives and consequences that the merger may entail'.22 In particular, it is important that the Commission correctly assesses whether merging companies would be likely to engage in anticompetitive practices regarding the acquisition of data or in preventing their competitors from gaining access to these data.
Furthermore, the Commission concluded that even if the entity was to use newly collected data, there would still be a 'significant number of market participants' which also collect user data24 and which would compete with the merged entity.
The Microsoft/LinkedIn case shed light on another data-based issue: the influence of data-protection laws in merger control. Similarly to the Facebook/WhatsApp case, the Commission in Microsoft/LinkedIn excluded potential competition concerns resulting from the combination of data. This time however, it also focused on the fact that any data combination could only occur if it were allowed in application of data protection rules. It noted the fact that the newly implemented General Data Protection Regulation, which provides for harmonised protection of personal data, may limit Microsoft's ability to have access and to process its users' personal data in the future, since the new rules will reinforce the existing rights and give individuals more control over their personal data.25
Another difficulty in social media mergers is the assessment of the potential consumer detriments that can be caused by data collection. One question raised by these recent social media cases and especially under Microsoft/LinkedIn is whether data protection and privacy issues could be considered as potential competition issues in merger control decisions. To answer this question, one should keep in mind that although the influence of data protection rules may be considered in merger assessment, it is not the role of the Commission to safeguard data protection and privacy in general. In Facebook/WhatsApp, the Commission refused to address potential privacy harms, considering that 'Any privacy-related concerns flowing from the increased concentration of data within the control of Facebook as a result of the transaction do not fall within the scope of the EU competition law rules but within the scope of the EU data protection rules'.26
While the substantive analysis of mergers of social media companies may not be fundamentally different from any other innovative industries, social media mergers are creating new challenges for the Commission:
- Challenges in defining the relevant market: The Commission is faced with new and evolving markets, such as the market for social networking or the market for consumer communication services. It has to define these markets precisely, in the presence of companies that often create the market themselves.
- Challenge in assessing the degree of market concentration: High-technology markets are constantly evolving, which implies constant changes in the positions of the competitors. The Commission can no longer rely solely on market shares to evaluate the market power of the actors of the market, and new criteria must be used.
- Challenges in assessing potential consumer detriment: with media mergers come new kinds of effects. For instance, the widespread collection of data, or networks effects, are typically related to media mergers.
1 Jérémie Marthan is counsel at Linklaters LLP. The author warmly thanks Elsa Mandel for her important contribution to this paper. The information in this chapter is accurate as of July 2017.
2 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014.
3 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016.
4 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016, Paragraph 74.
5 Case M.6281, Microsoft/Skype, Commission decision of 7 October 2011, Paragraphs 14 and 17.
6 Case M.7047, Microsoft/Nokia, Commission decision of 4 December 2013, Paragraphs 43-45.
7 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014, Paragraphs 20-34.
8 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016, Paragraph 83.
9 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016, Paragraph 86.
10 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016, Paragraph 115.
11 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014, Paragraphs 64-68.
12 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016, Paragraph 125.
13 UK Office of Fair Trading, 14 August 2012, Case ME/5525/12, Anticipated acquisition by Facebook Inc of Instagram Inc; Kyriakos Fountoukakos, the UK OFT decides not to refer an anticipated acquisition in the social networking industry to the Competition Commission (Facebook/Instagram), 14 August 2012, e-Competitions Bulletin August 2012, Article No. 50278.
14 Rato, Miguel and Petit, Nicolas, Abuse of Dominance in Technology-Enabled Markets: Established Standards Reconsidered? (January 29, 2014). European Competition Journal, April 2013. Available at SSRN: https://ssrn.com/abstract=2387357?.
15 Case M.6281, Microsoft/Skype, Commission decision of 7 October 2011, Paragraph 78.
16 General Court, T-79/12, Cisco Systems and Messagenet v. Commission of 11 December 2013.
17 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014, Paragraphs 99.
18 Non-Horizontal Guidelines, Paragraph 62 and footnote 64.
19 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016, Paragraphs 342-345.
20 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014, Paragraph 132.
21 Nils-Peter Schepp and Achim Wanbach, On Big Data and Its Relevance for Market Power Assessment, Journal of European Competition Law & Practice, Vol. 7, No. 2.
22 GCR Live 6th Annual Telecom, Media and Technology.
23 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014, Paragraph 185.
24 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014, Paragraph 188.
25 Case M.8124, Microsoft/LinkedIn, Commission decision of 6 December 2016, Paragraph 178.
26 Case M.7217, Facebook/WhatsApp, Commission decision of 3 October 2014, Paragraph 164.