[Urshila Pandit and Shefali Girish are final year law student at School of Law, Christ University]
Introduction
In April, 2020 the social media giant Facebook Inc. announced that it would be acquiring a minority stake in Jio Platforms Ltd. Central to the deal is WhatsApp, a messaging platform owned by Facebook. After the launch of JioMart consumers will be able to purchase products from local Kirana shops through WhatsApp. Payments for such goods would be facilitated through WhatsApp Pay a Unified Payments Interface (UPI) enabled app.
WhatsApp Pay faced its first impediment even before it was made fully available to consumers, when a complaint was filed with the Competition Commission of India (CCI). There were three main allegations. The first was that WhatsApp was dominant in the market for internet based instant messaging apps and the bundling of WhatsApp Pay with the instant messaging app would amount to an abuse of dominance, which would be in violation of Section 4(2)(d) of the Competition Act, 2002. Secondly, it would also amount to leveraging under Section 4(2)(e) and lastly, an imposition of unfair conditions in contravention of Section 4(2)(a)(i).
The CCI dismissed the complaint on the grounds that the suit was premature and there was no evidence that there was an abuse of dominance by bundling or leveraging. Though the CCI makes some interesting observations, it has missed an opportunity to recognize the need for ex-ante regulation in digital markets. This article also shows how the traditional tests that are relied upon are not equipped to handle the unique characteristics of a digital market.
Dominance of WhatsApp
Defining a relevant product and geographic market is a precondition to determining whether an entity is dominant. This process is more complicated in the context of digital platforms, as the services offered by such platforms are free, making traditional competition analysis redundant. In the present case the CCI defined two separate relevant markets, the market for Over-The-Top (OTT) messaging apps through smart phones and the market for UPI enabled Digital Payment Apps in India.
The Commission held WhatsApp to be dominant in the first product market by relying upon data that estimated the number of users of online messaging apps. It attributed the strengths enjoyed by Facebook to WhatsApp messenger. While the authors agree with the finding of the Commission, the means by which it arrived at this conclusion is questionable. WhatsApp is a group entity of Facebook; however it would be incorrect to attribute the strengths that Facebook enjoys to determine the market dominance of WhatsApp.
The CCI could determine WhatsApp’s dominance in the current scenario by drawing from a prior decision taken in a 2016 case regarding WhatsApp’s privacy policy. The CCI relied upon data demonstrating the large consumer base of WhatsApp to conclude that it was dominant in the market for instant messaging apps for smart phones. Large consumer bases often indicate strong network effects which can create a lock in effect, as switching costs are high. This in turn creates high barriers to entry in the market.
I. Bundling
The CCI found that there was no abuse under Section 4 in the form of imposition of unfair terms and conditions, bundling or leveraging. The authors agree that the integration of WhatsApp Pay with WhatsApp Messenger would not amount to an imposition of unfair terms and conditions though the requisites of bundling and leveraging are fulfilled.
Bundling is the act of combining goods or services and making it available to consumers as a package. In case of pure bundling, the goods or services cannot be availed separately. There are three perquisites to establish a case of bundling: first, that there must be two separate products, second that consumers are coerced into buying the two products together and lastly, that there must be an adverse effect on competition.
Separate Products Test
It is often sufficient to show that there are two distinct relevant product markets in order to fulfill the first criteria of bundling. However the products must also be looked at from the perspective of demand substitutability. Since WhatsApp Messenger and WhatsApp Pay are not substitutable services and operate in different markets the separate products requirement is met. However, the separate products test falls short in the digital market as it fails to take into account that product integration of discrete functions can be combined easily without market power.
Coercion
In the Microsoft case the European Commission held pre-installation to be anti competitive because of ‘consumer inertia'. Pre-installing WhatsApp Pay will lead to increasing usage over time and UPI payment services would eventually 'tip' to WhatsApp Pay. Pre-installation exploits consumer inertia and constitutes coercion, as it acts as a maintainer in turn strengthening the network effect and increasing switching costs. Competitors will now have to use major resources to overcome this problem.
Foreclosure
WhatsApp is unlikely to be found guilty of foreclosing competition under traditional foreclosure analysis. A naïve foreclosure analysis where the exclusionary effect of bundling is considered to be anti-competitive unless there are pro-competitive justifications should not be employed as it is a low threshold. A more appropriate test is the substantial foreclosure test, that would prevent rivals from achieving minimum viable scale. However, this test also falls short in a digital market as services are offered free of charge and customers are not prevented from using alternative products. This decreases WhatsApp's ability to foreclose competition.
In this case a 'but-for test' should be applied as the traditional tests fall short. This test will help determine whether competitors will be in the same position in the absence of bundling. Bundling of WhatsApp Pay with WhatsApp Messenger acts as an entry barrier to new competitors in the non-dominant market ie. the UPI Payments market. WhatsApp which is dominant as messaging platform is able to offer the bundled products and is thus at a competitive advantage as opposed to competitors who can only offer a single product.
II. Leveraging
The pre-installation of WhatsApp Pay should be recognized as leveraging by way of bundling. In the present case WhatsApp will be able to leverage its large consumer base to enter into a new market, UPI Payment Apps. This is also known as platform envelopment. This method of leveraging is anti-competitive as the existing platform is able to induce customer traffic on its messaging service onto its new payment system, not because it offers substantially better services, but because of bundling of its services. In a digital economy there exists a larger possibility to leverage due to a more direct relation between suppliers and consumers, having a direct impact on competition and increasing barriers due to network effect.
Remedies to tackle anti-competitive effects
There are three possible remedies to tackle such anti-competitive behavior in digital markets. One remedy is the use of ex-ante regulation. There is a need for such regulation in order to prevent entities such as WhatsApp from becoming ecosystems. Ecosystems are platforms that expand into the downstream or upstream market in order to exclusively address consumer needs in a particular area. While it is undisputed that such ecosystems can benefit consumers, in the long run it often results in an irreversible distortion of market competition. In this context ex post regulation fails to ensure a level playing field for competitors and intervene before a dominant enterprise has already distorted competition.
Ex ante regulation can be in the form of a co- regulatory framework and tools that focus on superior market power and strategic market status by assessing elements such as time spent by consumers on platform, ability to control data and preventing business from accessing a significant part of consumer base.
Ordering WhatsApp to offer WhatsApp Pay on a standalone basis could be a possible remedy as they are completely separate products. Since the product has not been designed as a single product with an interpenetrating design as consumers have to register separately for WhatsApp Pay, whether there is efficiency in integration must be assessed. WhatsApp is a pure messaging service and WhatsApp Pay does not require to be tied to increase efficiency.
The other plausible remedy can be mandating WhatsApp to enable the API access to other competitors according to fair, reasonable and non-discriminatory terms and display other apps that provide UPI payment services. This would provide choice to consumers and would increase consumer benefit as they can conveniently make transactions without leaving the messaging app. While it seems that this remedy would amount to forcing WhatsApp to enable competitors to benefit from the consumer base that WhatsApp is entitled to, platforms actually benefit from the presence of third party competitors as they can internalise efficiency in the form of commission fees.
Since digital markets are characterized by economies of scale, market tipping and minimal cost of expanding into ancillary markets, ex-ante regulation becomes pertinent. The WhatsApp case is only one such instance that highlights this. In light of this the CCI must take into account the nature of digital markets and the need for such regulation in future cases.