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Facebook, the data monopolist: Will the EU 'like' it?

13 August 2014

The Facebook - WhatsApp tie-up

The proposed acquisition of Instant Message provider, WhatsApp by Mark Zuckerberg's Facebook, threatens to create the largest repository of personal, user data held by any private sector organisation.

The only obstacle standing between Facebook and this new 'data monopolist' status is a merger control probe by the EU Commission, designed to ensure that the transaction will not prejudice competition with rivals in the messaging and social media spaces. 

The high value of the takeover (illustrated by the $19 billion purchase price) means that the transaction requires merger control clearance in order to proceed.  

Now seized of the case, the Commission has the power to block the deal completely, or to allow it subject to concessions from the merging parties. 

These could include a requirement to sell off part of the merged entities' operations, or to give binding undertakings to ensure it does not behave in a way which is adverse to a competitive marketplace. 

 Why does the deal need clearance?

The effects of the merger will be felt across several jurisdictions. Social media and instant messages connect people and businesses within frontiers and beyond them.

The deal has already been cleared by the US Federal Trade Commission (FTC).

Within Europe, Facebook has avoided notifying the deal to multiple national competition regulators across the EU by making an optional filing to the EU Commission. 

This displaces the jurisdiction of national watchdogs and sidesteps the tedium of multiple European competition filings. It also heads off the nightmarish prospect of conflicting regulatory outcomes.  

Why is the case significant?

The merger inquiry is the biggest test case of its kind into 'data markets' and social media business. The Commission has begun the process by sending out questionnaires to assess how stakeholders would be affected by the creation of the data goliath. 

The intelligence it gleans as a result of the investigation will be of invaluable assistance in investigating other markets characterised by high dependency on data.  

Facebook is already a giant in the market; having acquired popular photo app business, Instagram, in 2012. The Commission will be concerned with the increased leverage that Facebook would have to attract online revenues, such as from advertising.

This could include offering advertising simultaneously across multiple online platforms controlled by Facebook. Connecting users of Facebook messenger and WhatsApp could also create an unassailable advantage against rival messaging services, such as MSN and Yahoo.

The Commission will be concerned to ensure that this does not foreclose competitors' access to customers. The Commission will also examine whether the increase of Facebook's market powers could lead it to impose fees for the use of the services. 

For many, an inquiry into the pure competition effects of the deal entirely misses the point. They are concerned that the creation of a data juggernaut would ride roughshod over the privacy rights of Facebook and WhatsApp users. 

The Electronic Privacy Center and the Center for Digital Democracy called unsuccessfully for the deal to be blocked, at least until there had been scrutiny into "the ability of Facebook to access WhatsApp's store of user mobile phone numbers and metadata." 

They are particularly concerned that Facebook's aggressive data collection policies could be extended to unsuspecting users of WhatsApp, who had previously opted consciously for a more privacy friendly IM service.

Such arguments may, however, not be lost entirely on the Commission. Its questionnaires seek feedback from stakeholders on how the merged entity would use and control personal data when offering new services. 

Legally, however, the Commission will be constrained to examine such issues in the context of its narrow merger control remit. Unless the aggregation of personal data gives Facebook an unfair, competitive edge in the market, that will not be a ground to prohibit the takeover.

What will happen next?

The Commission will consider responses from stakeholders and carry out an in-depth investigation into the business effects of the deal.  A final decision can be expected later this year. 

The investigation will concern itself primarily with market structure, efficiencies, prices, consumer choice and the preservation of inter-firm rivalry. To the extent that the deal is considered to give rise to competition concerns, do not be surprised to see the Commission extract privacy related undertakings from Facebook. 

Again though, these must be targeted on some competition concern rather than a desire to protect users. 

If the deal does proceed without restrictive conditions, Facebook may now look to change the privacy policy of WhatsApp to allow it to harvest users' data.

Legally, it will need users' consent, but could obtain this by making agreement to the new policy a condition of continued usage of WhatsApp (having used a similar tactic following the Instagram purchase in 2012). 

The case highlights how corporate expansion can impact adversely on the interests of data protection.

This article was written by Paul Henty.

For more information please contact Paul on +44 (0)20 7427 6506 or paul.henty@crsblaw.com