Analysis: Reliance Jio-Facebook deal highlights India’s need to revisit competition regulations

Last week, it was formally announced that Reliance Industries Limited, Jio Platforms Limited and Facebook Inc had signed binding agreements for an investment of Rs 43,574 crore by Facebook into Jio Platforms. As a result of the agreement, Facebook will acquire a 9.99% stake in Jio Platforms. Reliance Retail and Facebook-owned Whatsapp have also entered into a commercial partnership under which Reliance Retail’s Jio Mart platform will support small businesses on Whatsapp.

Reports have stated that the deal will undergo close scrutiny by the Competition Commission of India before going ahead. The size of the companies in question, the scale of market that they control and their intended business models pose complex competition law issues.

Since the 1980s, the Chicago School began to dominate the antitrust law in the United States, and by extension attained mainstream status in several other jurisdictions as well. Led by judges such as Bork, Posner and Easterbrook, the Post War idea of preserving competition as a bedrock of democracy was relegated to the sidelines, with the primary focus being on “consumer welfare”. In effect , this meant that as long as prices did not rise as a result of vertical or horizontal integrations, the courts were unlikely to take a dim view of it.

As Lina Khan documents in her now-famous Yale Law Journal article “Amazon’s anti-trust Paradox”, before the emergence of the Chicago School, anti-trust ideas were governed by structuralism that championed the notion that concentrated market structures are inherently anti-competitive.

Three reasons

This is due to three reasons. First, they enable dominant actors to coordinate much more easily, thereby facilitating anti-competitive practices like price-fixing, market division and tacit collusion. Second, they enable abuse of dominant positions to block new entrants. Finally, they leverage greater bargaining power for monopolistic firms to the detriment of consumers, suppliers and workers.

Khan ascribes the Chicago anti-trust framework that jettisons competition to an incomplete understanding of “consumer welfare” as short-term price effects. This understanding fails to adequately capture and regulate the layers of market power in the modern economy. Most critically, it does not account for the grave risk of predatory pricing and the integration of business entities across markets – an issue that is exacerbated in the case of platform markets.

The size of network power that the big technology firms control is unprecedented. There are about 260 million Facebook user in India, while Apple and Microsoft supply 95% of desktop operating systems globally. Ninety nine per cent of mobile phone operating systems are shared between Google and Apple. Jio currently holds a 32% share in the 1.15 billion users Indian mobile services market and is largest player in India both in terms of number of subscribers and revenue share.

Facebook began with the social networking business, but soon acquired Instagram to capture the online photo and video sharing market, using its Messenger and acquiring WhatsApp to acquire a large share of the online messaging market. The marriage of business models of two highly dominant players like Facebook and Reliance Jio facilitates what is often called “two-sided markets”.

Two-sided markets

There are two distinct user groups that when brought together, provide each other with network benefits. Consumers are both the source of data, as well as the product. The advertisers are the customers, and they provide the market’s revenue and depend on the scale of the market. The kind of scale enjoyed by these two companies can provide advantages that are irreversible in a competitive system without interventions.

Another important question is the erosion of free and informed consent on part of the user. Germany’s Federal Cartel Office, the country’s antitrust regulator, held last year that Facebook was exploiting consumers by forcing them to consent to the terms of data collection if they wanted to open an account. The German regulator also held that Facebook used its vast data collection to set up its position of dominance, effectively taking meaningful choice away from the consumers.

India’s competition law is much more recent than that of its western counterparts. In fact, the Sherman Antitrust Act in the US existed a good 77 years before India even gained Independence. The first Indian legislation to govern monopolies and competition was the Monopolies and Restrictive Trade Practices Act of 1969. This was later repealed and replaced by the Competition Act. The current version of the competition law goes back to 2002, which primarily prohibits agreements “which causes or is likely to cause an appreciable adverse effect on competition within India”.

Indian approach

Indian competition law does not adopt the structural approach that Khan advocates. The presence of an anti-competitive agreement or an abuse of a dominant position is necessary for a company to be held liable under Sections 3 and 4 of the Competition Act. Merely having a dominant position is not sufficient enough to attract trouble from the Competition Commission of India. Much like the US Post Law 1980, they prohibit specific types of monopolies – agreements to determine price, agreements to limit supply, agreements to share a market, and agreements to engage in collusive bidding.

Section 19 (7) of the Competition Act looks at the “price of good or services” as one of the key criteria in determining the “relevant product market”. However, in the case of digital technologies, particularly those involving “two-sided” or “multi-sided” markets, only one side needs to function as the profit centre while the other side’s use of the service is subsidised. Thus, free online services often pay for themselves through their access to tradeable personal data and preferences of their consumers.

The Report of the 2019 Competition Law Review Committee recognises this challenge and suggests emulating the German model where services being provided free of charge is not sufficient to invalidate the assumption of a market.

Unregulated areas

In this case, the partnership is intended to enable horizontal movement into newer spaces for both companies – the entry to Jio into the e-commerce space, and facilitate building an online payment space for Facebook. The 2019 review report also rightly highlighted the limitation of merger control regulations in India. These are based primarily on indicators of asset and turnovers. In digital business models working at scale, the focus is always on building a user base so as to capitalise on network effects, and immediate revenue is a secondary concern. Thus, deals that do not meet the asset or turnover threshold yet pose significant competition risks are largely unregulated.

Currently, the competition regulations broadly regulate two kinds of business arrangements. Horizontal arrangements having appreciable adverse effect on competition are typically arrangements between businesses at the same level in the production chain and generally refers to conduct such as fixing prices, limiting production, sharing markets and collusive bidding.

On the other hand, vertical arrangements involve businesses at different levels in the production or supply chain, say an arrangement between the manufacturer and a distributor.

Digital business models and business arrangements within it may not fit squarely within these two categories, and therefore, the committee recommended that aside from horizontal and vertical agreements, other agreements which may lead to appreciable adverse effect on competition also need scrutiny.

Dominant position

Another area of reform that needs attention are the indicators of dominant position. Currently, the focus is on factors such as market share, size and commercial advantages. With digital business models, an emerging indicator of dominant position is also access to data. Given the network effects, access to data has the potential to be a significant barrier to entry. Again, the German position where “access to data relevant for competition” is an important factor for determining dominant position would be helpful to look at.

The public communication about the deal has indicated that there will be no data sharing between Reliance Jio and Facebook. However, in the past, Facebook has backtracked on similar promises made at the time of its acquisition of WhatsApp. The press communication already states that there is an intent to cross-leverage ecommerce platform JioMart and the recently approved WhatsApp Pay, to grow both businesses.

It remains to be seen how the competition regulator will react to this deal, and whether it poses any clear restrictions on matters such as data sharing. However, what this deal makes clear, more than ever before, is that the competition regulations may need to be relooked to adequately address digital business models. The recommendations from the Report of the 2019 Competition Law Review Committee may be a good place to begin.

Amber Sinha is a lawyer and Executive Director of the Centre for Internet and Society. Arindrajit Basu is a Research Manager at the Centre for Internet and Society, All view expressed here are personal.