By: A. Swetha Meenal
Cited as the biggest FDI in the Indian technology sector so far, Competition Commission of India’s (hereinafter ‘CCI’) approval of the acquisition of 9.99% in Jio by Jadhu Holdings LLC, an indirect wholly-owned subsidiary of Facebook, has raised several eyebrows in the context of data concentration and its effects on privacy. Given the unparalleled market power of both the entities in their respective fields, the concurrent launch of the Jio-Mart app that would function through WhatsApp has the potential to significantly alter competition in the e-commerce sector. The data concerns and the privacy concerns the conglomeration sparked has successfully steered the focus of the deal from the potential exclusionary affects the e-commerce sector would face in the relevant target market.
A BRIEF OVERVIEW OF THE LAW AS APPLICABLE TO MINORITY ACQUISITIONS
According to the Indian law, under Item I Schedule I of the Combinations Regulations 2011, an acquisition of shares of under 10% would be regarded ‘solely as an investment’ where the acquirer (i) has the same rights as that of an ordinary shareholder, (ii) has no right to nominate or appoint a director, or has no intention to participate in the affairs of the target. Although the CCI on several occasions has stated that the threshold cannot be the sole determining factor and that the surrounding circumstances should weigh into the discussion, it is restricted, in application, to instances where the target and the acquirer are involved in competitive or substitutable business at the time of the investment. Even by this metric, the few existing overlaps between businesses of Facebook and Jio, the surrounding circumstances and the public declaration of intent must have raised red flags.
Scholars argue that control cannot be a sole determining factor in the assessment of passive investments and that the question must focus on the power of the firm to influence performance and distort the competition for others. Admittedly, most of the ex-ante analysis is presumptive and hypothetical, and raise concerns regarding chilling of investments, rate of innovation and consumer welfare. However, a few precedents like the acquisition of YouTube and Instagram by Google, or the Microsoft/LinkedIn deal reveal certain patterns that recur in most combinations. These set a strong case for ex-ante regulation of tech combinations involving influential entities without the fear of drawing criticism.
In the context of the Facebook-Jio deal, the proponents of the deal might flag the potential benefits that could accrue to the local kiranas, other small and microlocal Indian businesses as “ procompetitive” efficiencies. However, a real analysis must focus on the potential competitive constraints that the investment could eliminate for the target company at the cost of raising the same for the competitors and new entrants.
FORM BASED ANALYSIS
Mimicking the principle of a classic tie-in where the dominance in one market is used to leverage the position in another market, Jio-mart’s business arrangement is modelled to leverage the market power of WhatsApp amongst Indian Mobile Consumers to get to a large consumer-base for itself without the element of compulsion as in a tie, therefore warding off competition violations under section 3 of the Indian Competition Act, 2002 (hereinafter the ‘Act’). While this set-up does not mandate that use of WhatsApp be predicated upon the use of Jio-Mart, it places a heavier reliance on behavioural economics and ‘voluntary actions’ to push its business forward by building on its acquirer’s influence.
A signature advantage of an acquisition or an investment of this nature (in terms of their influence, digital presence and e-commerce offerings) is the conglomeration of resources of both the entities, even for a limited purpose. This would give Jio the potential to use Facebook’s expertise and market power (i.e., WhatsApp’s unprecedented penetration into the rural sectors of India) to support its new venture through guaranteed customers or comparatively earlier customer interaction, amongst other advantages, already raising concerns under section 6(1) of the Act. In the case of Jio-Mart, barriers to entry and exclusion of competition would occur on account of two important factors, that are both form-based and effects-based.
Additionally, the model also offers several financial incentives. In the case at hand – in addition to the leverage provided by WhatsApp, the influential brand names that the entities already possess, financial and intellectual capital pooling that might exploit consumer behaviour and bias, Jio-Mart’s 5-50% discounts, lucrative cashback offers, amongst other things attracted over 2.5 lakh orders and had crossed 1 million downloads- and stood amongst top 3 most used shopping apps in India, within a few days of its launch.
Unfortunately, the practice of offering deep-discounts and cash-back offers does not warrant much interference by the Competition Authorities in India. Much of CCI’s discussion is limited to analysing the dominance of the entity, and sometimes dominance has been assessed in the larger context of online and offline markets. The commission has not commented on the effect of deep-discounts and cash-back offers as a practice in itself. Further, its preference towards consumer welfare standard makes it view affordability and reduction in consumer spending as efficiency-generating strategies, even after consumer acclimatization towards a market. But the fact that these become factors of concern when seen under relevant context and circumstance is overlooked.
The form-based analysis of this model is straight-forward and has been widely studied. The following section would therefore analyse potential market effects of Jio Mart in a market consisting of e-commerce platforms offering hyper-local grocery shopping and delivery services (as the relevant market), with a specific focus on consumer preference and behaviour.
EFFECTS BASED ANALYSIS: CONSUMER PREFERENCE AND BEHAVIOUR
Consumer preferences and behavioural patterns, moulded by the schemes and practices of dominant enterprises, often raise one of the most overlooked, but extremely important competition issues. Certain choices that are made persistent by corporate strategies could raise significant entry barriers and exclude competitors; competition decisions must factor in consumer behaviour as a part of their analysis, ex-ante. Precedents involving tech-giants demonstrate that the metric for analysis of platforms that operate in the digital space or for e-commerce markets, must not assess competition purely on the basis of neo-classical theory, for in most cases it does not explain corporate influence, intent and strategies. In fact, the European Commission’s arguments against Microsoft were built on empirical analysis of consumer behaviour and responses to various corporate models.
Regulation of contemporary markets, therefore, requires the understanding that a strict form-based approach could lead to the assumption of false-positives and that consumer bias and rationality could play a bigger role in the assessment of competition harms. This, in turn, requires the understanding that ‘harm’ in strict competition sense must involve a holistic analysis of market harms, i.e., harms caused to the competitors (exclusionary harms) and harms caused to the consumers in the long term (exploitation).
The following segment will analyse how consumer preference lifts competition constraints for Jio in urban and rural sectors:
In 2019, Vijay Shekhar Sharma, the founder and CEO of Paytm, stated in an interview that mobile apps that offer a range of services carry the potential to take over businesses that offer fewer transactions in a day. In this regard, several e-commerce services that interact with consumers through mobile applications are seen expanding its services and features through investments, acquisitions and, tie-in features. The Paytm app has long moved from offering just online financial transactions to offering travel-related service, hotel bookings, e-commerce offerings that allow consumers to shop clothes, shoes, books, etc., and further hosts a number of mini-games to engage customers. Flipkart hosts a number of mini-apps, that can be accessed from within Flipkart’s own interface, to offer transport, travel and hotel services, in addition to the general shopping services that the app initially offered. While these can be dismissed as competition that encourages overall efficiencies, “super-apps” created under co-operative agreements between two giants could potentially reduce the need for consumers to multi-home apps offering same or similar services. This obstructs the ability of the competitors to compete effectively, and ought to attract a violation under section 4 (2) (c) of the Act.
While it is true that there is a high awareness and usage of third party apps amongst Indian consumers, who often multi-home and use more than one application for any given service to exercise choices based on their liking, a study published by Mr. Hussain Fakhruddin, the CEO of Teksmobile, reveals that app retention level in mobile phones is generally extremely low, with aggregate app-uninstallation rates at 83% to 90%. This is because customers still grapple with the idea of data management, and would not download an extra application if that implies compromising on the storage front. This implies that apps that offer less utility or require installation of additional apps to function effectively are likely to be uninstalled.
In application to the WhatsApp-Jio Mart, the proposed model would enable them to make in-app orders and payment without the need to download separate applications to perform these functions. In such a scenario, most consumers might not prefer to multi-home several hyper-localised grocery-delivery apps to place orders and a separate application to make payments when WhatsApp acts as a one-stop app that performs all these functions seamlessly. While it is not completely denied that the consumers might not shift to the alternatives like Amazon’s “Local Shops” or stick to Bigbazaar’s app, given the existing loyal consumer base for both the apps, the fact is that by using WhatsApp as its gateway, Jio Mart would experience earlier interaction with a reasonable number of consumers than what it would ideally take to ‘break’ into a market. Where Jio-Mart becomes a feature of WhatsApp that is also to include WhatsApp pay, the utility increases multifold on all sides of the platform. Consumers prefer products that offer them the maximum endpoints and hardly worry about information unrelated to their payoffs. This convenience-induced bias is further exploited with competitive deep-discounts and cash-back offers, giving the illusion of generating efficiencies and welfare in the short run.
India is home to a whole new category of consumers who have just embarked on the tech-journey with the introduction of Reliance Jio – most of them being rural. In 2019, over 277 million rural users were introduced to the internet following cheap access to 4G granted by Jio’s “Welcome offer” scheme, whereby new subscribers were offered unlimited data and voice calls for over a year. It has been predicted that by the end of 2020, India would have over 315 million rural internet consumers. 70% of these rural internet users purchase internet solely for social networking and instant messaging, with Facebook and WhatsApp being the most popular apps, and less than 15% of the rural consumers resort to online purchasing.
Consumer bias elevates when their ability to access information about various sellers in the market and their ability to assess their efficiency is hampered. This could affect consumers’ ability to drive the market. This problem is further exacerbated when corporations identify these biases and exploit them by obfuscating prices or playing with the complexities of access in ways that most players cannot afford to. This is a common phenomenon in rural sectors. The popularity of Reliance-Jio, Facebook and WhatsApp in rural homes, when compared to Amazon, Swiggy or Flipkart, already provides this venture with an added advantage of being familiar brands that have established a certain relationship with the consumers. Hence, in their assessment, Jio has already established itself as extremely affordable and reliable, and remains to be the reason they have affordable 4G internet access.
To this category of users, switching costs are exacerbated by information asymmetry, the lack of familiarity with different interfaces, social preferences of their circles (controlled by WhatsApp’s and Jio’s brand image), lack of willingness to switch given the financial incentives and the convenience of usage – for most Indians are price-sensitive consumers.) These factors would play a huge role in determining the limitations of their interactions with the app-store and e-commerce market. These unconscious switching costs would tip the market in Jio-Mart’s favour in the rural area, despite the existence of other competitors who might roll out superior apps, but would have to invest in compelling marketing, specifically in the rural areas, and still might not be able to effectively interact with the consumers. This is because these consumers will require an additional nudge to navigate additional steps of having to download new apps from the Play Store, familiarise themselves with the same while questioning their reliability.
Competition Authorities, in general, do not consider switching costs as technical constraints where the users are free to multi-home several applications on their devices. However, the European Commission flagged this as a concern, citing the degrading quality of Bing, Yahoo! and DuckDuckGo in light of Google’s practices, based on hard evidence and rejecting traditional analysis of competitive constraints. While Google’s fact scenario involved battling default pre-installed apps, which is not the case at hand – a business-venture that consummates two most popular household names in rural India might just have a similar effect. The inevitable conclusion here is that emerging digital markets, with its dynamic structure and presence, require modern analytical tools to produce reliable results to assist in ex-ante regulation of their conduct.
Thus, the ‘general market practices’ could influence the market to a greater extent and potentially tip the market in a certain entity’s favour when their market power and influences are overlooked and approved based on its form.
Hence, the ultimate question comes down to the potential of the acquiring entity and the target to influence market trends and affect the competition. Wherever found possible, ex-ante regulation must make combinations with the potential to disrupt markets costlier. This could be achieved by issuing prohibitory guidelines to these entities to ensure that the conglomeration of resources, capital and data do not cross a set threshold, and that the entities do not violate certain restrictive covenants that the combinations are approved on. At the very least, this could prevent active nurturing of entities that go on to monopolise the market over time, and encourage practices that protect the market in the long run.
(Swetha is a Chennai based lawyer, who specialises in Commercial laws, and holds a keen interest in the regulation of AI and tech. She may be contacted here.)
Cite as: A Swetha Meenal, ‘Corporate Influence and Behavioural Economics as Drivers of Competition: A Case Study of Jio Mart’ (The RMLNLU Law Review Blog, 27 September 2020) <https://rmlnlulawreview.com/2020/09/27/corporate-influence-and-behavioural-economics-as-drivers-of-competition-a-case-study-of-jio-mart > date of access.