FACEBOOK'S ACQUISITION OF KUSTOMER: ANALYZING THROUGH THE LENS OF EXCESSIVE DATA COLLECTION

This post is authored by Akshat Kothari and Samridhi Shrimali, third-year students of B. Com. LL.B. (Hons.) and B.A. LL.B. (Hons.) respectively at Institute of Law, Nirma University, Ahmedabad.

1. INTRODUCTION

The European Commission has initiated an in-depth inquiry into Facebook's proposed acquisition of U.S. consumer company Kustomer under the EU Merger Regulation, 2004. The Commission is concerned that the planned merger may reduce competition in the market for customer relationship management (“CRM”) software. The Commission is also particularly worried that the proposed deal would bolster Facebook's market position in the online display advertising market by adding to the already substantial amount of data accessible to Facebook for the personalization of the ads it shows. Hence, there lies a concern that the merger might lead to abuse of dominance by Facebook, which may result in foreclosure of the market, personalized pricing, and behavioral manipulation.

Facebook being one of the largest social networking sites, as well as a messaging service and an online advertising platform, holds a dominant position with huge network effects in the market. Kustomer is a CRM software supplier based upon extensible data that allows organizations to manage customer communications across several channels (phone, email, SMS, WhatsApp, Messenger, and Instagram) with a single tool. WhatsApp, Messenger, and Instagram are among Facebook's messaging services which supply a large amount of data to the CRM software companies. This customer’s model represents a contact within an organization, comprising existing customers, perspectives, and leads in respect of the customers. In this article, we would analyze the investigation to show how this excessive collection of extensible data through this software if used by the dominant undertaking would lead to, firstly, foreclosure of the market, secondly personalized pricing, and thirdly, behavioral manipulation of the consumers.

2. EXCESSIVE DATA COLLECTION VIS-A-VIS FORECLOSURE OF MARKET

The European Competition Regulator’s preliminary interest is the reduction of competition in the market CRM Software. Digital markets cause a strong network effect as the value of the provided service increases with the increase in the consumers.[i] When there is an increase in the users of a service, companies tend to upgrade their service by innovation in order to maintain their number of users and to match up with the competition in the market. Tech Giants like Google and Facebook possess a strong database of users through which they reduce their search costs to almost zero. This is the result of combined information from many vendors and product offers, allowing customers to access and process information more quickly and efficiently. Moreover, in the digital markets, the flow of information is processed by collating and presenting only the relevant information to the users, through which companies increase their network effect. This process of network effects creates a lot of antitrust challenges such as barriers to entry for new entrants, due to the predominant players that are already well-established in the market. Hence, this causes vertical restraints in the digital market which are called digital (online) vertical restraints. Vertical restraints are those restraints that are caused due to the vertical agreements and these restraints may foreclose the market by denying access to suppliers and gaining market power, softening competition or facilitating collusion. As a result, these platform technologies may impose vertical constraints by discriminating, foreclosing markets, and distorting level playing fields in the dynamics of digital markets.

In the present situation, one of the primary concerns of the European Commission is that Facebook might restrict the access of its channels namely, WhatsApp, Messenger, and Instagram, which are important sources of information/data collection for the quality supply of the CRM software services. Facebook is a well-established player in the market with an already existing strong network effect and thereby, it has the ability as well as a strong incentive to foreclose the market when compared to the Kustomer’s rivals. For example, it can deny access to the rival companies of Kustomer from using the Facebook channels or can degrade the quality of the access to the companies. This can create a digital vertical restraint and consequently foreclose the market as it restricts the access of channels and facilitates the collusion. Hence, this practice can dynamically influence the market in an overwhelmingly negative fashion as it can possibly lead to foreclosure of market and thus can create an antitrust challenge. This is line with a similar situation which occurred in Malaysia, where the Malaysian Competition Authority (MyCC) issued a proposed decision against Dagang Net Technologies for infringing the competition act and allegedly abusing its monopoly status as per the provisions of trade facilitation services under the National Single Window for refusal to supply the electric mailbox to end users of the Sistem Maklumat Kastam (Custom Information System), creating entry barriers to the point where competition was hampered. Relating the same to the present circumstance, it becomes evident that the monopoly status leading to excessive data collection might lead to foreclosure of market if concerns are not raised and accordingly investigated.

3. EXCESSIVE DATA COLLECTION VIS-A-VIS PERSONALIZED PRICING

When undertakings start distinguishing between individual customers and the whole market, it disturbs the dynamics of the market. Personalized pricing entails using data analytics to offer customers different prices based on their personal features and preferences. This personalization leads to abuse of dominance because an undertaking holds market power over individual consumers. Such market power is derived only through personalization which disables the customers’ ability to choose freely. Similarly, in the current circumstances, Facebook may readily obtain data such as 'customer transaction data' and 'other event data' from companies that use Kustomer's CRM software. As a result of the personalisation of advertisements, rival companies will find it difficult to match Facebook's ability, robbing customers of their freedom of choice. Thus, the customers will have to pay higher prices and their ability to choose freely would be restricted resulting in disturbing the market dynamics.

4. EXCESSIVE DATA COLLECTION VIS-A-VIS BEHAVIOURAL MANIPULATION

European Commission in its statements has not explicitly mentioned the apparent behavioral manipulation which could be caused as a result of Facebook getting hold of the vast amount of data from Kustomer. Personalization has been changing the operation of the market. Firms and big tech companies closely monitor the user's behavior by using online third-party tracking and then detect the user’s individual preferences. This practice decreases the market uncertainty which harms the objective of free competition. Moreover, it makes consumers suffer from behavioral biases that can be exploitative in nature vis-à-vis digital markets. For example, once it was alleged that Uber was aware of the mobile phone battery of its users, enabling it to ask for higher prices by taking advantage of their urgency. This way, businesses can profile individual consumers and manipulate their choices and preferences based on user’s personality traits. When sellers use personal data and cognitive biases to tempt users into purchasing more or different goods or services, than they would have bought otherwise, this type of behavioral manipulation can result in an overall increase in consumption. While such practice of personalization might improve the performance of the services offered by a business entity, it causes issues like reduction in autonomy by steering the choices of the consumers. In the present case, as Facebook is getting hold of excessive data, in order to improve its services, the plausibility of Facebook personalizing its advertisements and, resultantly manipulating the behavior of the consumers is high. This exploitation of customers and the digital market foreshadows future harm to the ideals of free competition. Thereby, along with the concerns of foreclosure and personalized pricing, the aspect of behavioral manipulation ought to be taken into consideration in the investigation.

5. FINAL REMARKS

From the analysis of the investigation, it is realized that given the fierce rivalry between different platforms in many digital marketplaces, determining the threshold at which a firm may be declared dominant for the purposes of competition law enforcement can be difficult. For example, Section 5 of the Federal Trade Commission Act, 1914 (“FTC Act”) is used to tackle substantial anticompetitive behavior by non-dominant enterprises through rules regulating unfair trade practices. It forbids "unfair or deceptive acts or practices," which includes both misleading and unfair conduct. It is significant to note that it can be applied to a firm’s practice even when it has no contract with, and has made no representation to the relevant consumer(s). Thus, the idea is that where the dominance of a firm cannot be proved, an alternative approach should be inculcated. EU lacks these corresponding provisions but if inculcated, such provision would help tackle the issue of proving dominance in the digital markets.

Overall, the competitive harm presented by online vertical restrictions, as well as the potential benefits, are similar to those of offline vertical restraints. Competition authorities generally use a standard strategy for assessing offline vertical restraints. This includes determining whether the agreement shall have an adverse effect on competition and whether it creates barriers or forecloses the market, or drives existing players out of the market. However, because of the specific competition problems raised by online vertical constraints, such as the necessary extensive and complicated assessments undertaken by competition authorities taking a long time — by technological standards, a competition authority's standard strategy to deal with offline instances needs to be modified in the case of online vertical restraints. Another loophole in the standard strategy used is that it does not ensure due process because of the complexity of a case. For this reason, a stricter use of interim measures ought to be applied. Moreover, it is suggested that where the mechanism for imposing interim measures is unsuccessful, it can be altered to counteract some of the consequences. Certain enforcers (such as the UK's Competition and Markets Authority) have the "market investigation" weapon at their disposal, which allows them to impose changes in a market's competitive conditions without initiating enforcement actions. Moreover, enforcers must also take behavioral insights into account when devising remedies.

ENDNOTES: [i] Augustine Peter and Neha Singh, Chapter 2: Online Vertical Restraints and Abuse of Dominant Position: The Emerging Indian Perspective, 79 Global Competition Enforcement: New Players, New Challenges, International Competition Law Series 43 – 74.