The $19-billion proposed acquisition of WhatsApp by Facebook should be scrutinised by the Indian antitrust regulator, the Competition Commission of India (CCI). Under the (Indian) Competition Act, 2002, the CCI has the mandate to review mergers for anti-competitive effects and can even block a deal which could adversely affect competition in the Indian market. Although both Facebook and WhatsApp are US-based companies, under Indian competition law, any international merger or acquisition, which has substantial local nexus to India, cannot be concluded until merger clearance in India has been obtained or a review period of 210 days has passed, whichever is earlier.
The India local nexus requirement for a foreign-to-foreign transaction (such as the Facebook-WhatsApp deal) would be met if the parties in the transaction have more than Rs 750 crore in assets or Rs 2,250 crore in turnover, in India. Given WhatsApp's limited turnover, it is likely that the deal will fall outside the India merger notification thresholds. However, even if the merging parties do not cross the asset/turnover thresholds, under Indian competition law, the CCI could still acquire jurisdiction to scrutinise a deal if it could "ordinarily" lessen competition in the Indian market.
Given the massive user base of Facebook and WhatsApp in India, there would be an overwhelming public rationale to suggest that the deal could ordinarily cause anti-competitive harm in the Indian market and the CCI should scrutinise the deal. If a transaction that has the capacity to affect approximately 130 million Indian customers does not have an India nexus, what would?
This, however, does not mean that the CCI will necessarily find the deal anti-competitive, but that given the number of Indian consumers that the deal could affect, it should at least be scrutinised from a consumer harm perspective.
It has been reported by Bloomberg, that Facebook's WhatsApp deal could avoid a US antitrust challenge based on the fact that in the US unpaid mobile-messaging market, WhatsApp has several competitors and the entry barriers are low. The same may not be said in the Indian context.
Unlike the US, where WhatsApp's market share is meagre, it clearly dominates the Indian unpaid mobile-messaging market. According to VC Circle, WhatsApp had 36 million active users in India as on February 2014. WhatsApp's competitors in India, such as "Line" and "Hike" have only 16 million and 15 million active users in India, respectively.
Further, unlike the US telecom companies, which provide unlimited voice and text messaging service, under the guidelines of the Telecom Regulatory Authority of India, telecom companies in India have to mandatorily charge a minimum rate for each text message. On the other hand, WhatsApp provides unlimited instant messaging service, free for the first year and charges 0.99 cents for each subsequent year. Therefore, WhatsApp needs to compete more vigorously with its competitors (both mobile messaging applications and traditional telecom carriers) than in India, where it is subject to much lower competitive constraints.
One may argue that in a dynamic technological market, where barriers to entry are almost non-existent and where there are no economic obstacles to shift to a competing provider, since the services provided are mostly free, a current/future mobile-messaging company could easily acquire WhatsApp's current market share. If such reasoning is right, would it make business rationale for Facebook to invest $40 per user of WhatsApp, when WhatsApp charges only 0.99 cents per user and provides no advertising revenue, only to see such investments being eroded by a competing service provider?
It is worth considering that the intensity of the network externality caused by the combined user base of WhatsApp and Facebook (which currently has approximately 100 million active users in India) could raise the entry barriers and make competitive entry difficult in the Indian market. A network externality occurs where a network becomes more valuable to each user as more users are connected to it. WhatsApp is estimated to have a billion users by 2015, based on its pace of one million new users everyday, and a considerable chunk of that number is from India. For Indian consumers, the WhatsApp-Facebook social media platform would be more valuable, allowing them to be connected to many more users than any other such service provider.
Facebook's "Facebook Messenger" and "Instagram" directly compete with WhatsApp in the unpaid mobile-messaging market and, therefore, the deal also allows Facebook to remove an aggressive and hugely popular competitor from the Indian market. A survey conducted by Jana Mobile, respondents in countries such as India, Brazil, and Mexico, preferred WhatsApp over Facebook, 12 to 64 times.
Finally, although it is too early to say if the Facebook-WhatsApp deal is anti-competitive, the fact that the deal could affect approximately 130 million Indians (more than the entire population of Japan) at least warrants an antitrust scrutiny by the country's fair trade regulator.
The writer is a competition lawyer with the Competition Commission of India.
These views are personal