facebook and whatsapp merger case study

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What the petty office clashes at Facebook and WhatsApp were really about

The Wall Street Journal’s report on the troubled merger  of Facebook and WhatsApp has all the ingredients of a doomed love story. There was the lavish proposal (Facebook’s $22 billion purchase of WhatsApp in 2014) and rosy honeymoon (during which time Facebook decorated a building in WhatsApp’s signature green to welcome employees to its Menlo Park campus).

But then came the discovery of mismatched priorities. Facebook was apparently surprised that privacy-minded WhatsApp would not reneg its pledge to remain ad-free; WhatsApp was apparently surprised that Facebook wanted to make money.

And then, as things started to go wrong, a descent into unbelievable pettiness.

The most memorable part of Kirsten Grind and Deepa Seetharaman’s account in the Journal, as highlighted in journalist Casey Newton’s newsletter The Interface , is their description of petty squabbling between Facebook and WhatsApp employees over the minutiae of office life:

Some [Facebook] employees even took issue with WhatsApp’s desks, which were a holdover from the Mountain View location and larger than the standard desks in the Facebook offices. WhatsApp also negotiated for nicer bathrooms, with doors that reach the floor. WhatsApp conference rooms were off-limits to other Facebook employees.

“These little ticky-tacky things add up in a company that prides itself on egalitarianism,” said one Facebook employee.

[WhatsApp cofounder Jan] Koum chafed at the constraints of working at a big company, sometimes quibbling with Mr. Zuckerberg and other executives over small details such as the chairs Facebook wanted WhatsApp to purchase, a person familiar with the matter said.

On first read, a story of billionaires and well-compensated tech workers complaining about their office furniture sounds like a case of entitlement run amok.

But as any couple bickering in the aisles of an Ikea will tell you, it’s never just about the furniture . The culture clashes between Facebook and WhatsApp employees follow a predictable pattern of mergers between companies with misaligned principles, and reveal conflicts far deeper than angst about toilet stalls.

Facebook and WhatsApp’s values were mismatched from the beginning. Famously lean WhatsApp was obsessed with user privacy and opposed to ads. Facebook was—well, Facebook. For the first two years after the purchase, WhatsApp continued to operate largely independently.

But as Grind and Seetharaman’s reporting makes clear, the relationship started to deteriorate in 2016, after Facebook decided to limit ads in users’ news feeds on Facebook and started looking elsewhere for revenue. CEO Mark Zuckerberg and COO Sheryl Sandberg urged the smaller company to assimilate into Facebook’s larger culture and, crucially, to integrate ads into their service. By January 2017, when WhatsApp employees moved into the Facebook offices 10 miles away from their previous digs, it was clear that they weren’t just losing an office. Their whole value system was under threat.

This moment of disillusionment is typical in mergers, business professors say. Acquisitions are stressful for both parties, especially the acquired party. In a case of two companies that merge without seeming to reconcile fundamental differences in philosophy and strategy, that stress frequently morphs into something more toxic.

“The first thing that an acquired party figures out is that they lose autonomy, which is akin to control,” says Arvind Malhotra, a professor of strategy and entrepreneurship at the University of North Carolina’s Kenan-Flagler Business School. “They try to reestablish autonomy by trying to control the small things, what I call misdirected control. So, if two parties (acquirer and acquired) do not spend time during the courtship in figuring out how they would create the autonomy for the acquired party, then we get this lashing-out effect.”

Ultimately, the partnership between Facebook and WhatsApp’s founders did not last. WhatsApp co-founders Brian Acton and Jan Koum have announced their resignations, walking away from a combined $1.3 billion in stock options that would have vested had they stayed on at least through November—more evidence that it was never about the chairs.

“Just like a marriage, if there are things that are fundamentally out of alignment, it’s not going to hang together,” says George Geis, a professor at UCLA Anderson School of Management. “[I]f people are willing to change over time, that’s a different story,” he adds, but “in this case, this is a fundamental difference [over] what a company should do with its information.”

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WhatsApp Acquisition

Why whatsapp, whatsapp and mobile users, the bottom line.

• Corporate Finance

WhatsApp: The Best Meta Purchase Ever?

With so much cash thrown around in Silicon Valley , it’s not easy for an acquisition to cause a stir. Facebook's ( META ) (now Meta) acquisition of WhatsApp in 2014 did just that—surpassing Google's $3.2 billion purchase of Nest Labs and Apple’s $3 billion Beats Electronics procurement—to become one of the largest tech buys of all time.

WhatsApp, a text messaging app used widely across the globe, stole headlines with its initial $16 billion bid from Facebook. In 2013, the app lost $138 million and brought in $10.2 million in revenue. So how did the company win over Facebook?

Key Takeaways

• Facebook purchased WhatsApp in 2014.
• Facebook's bid price was astronomical, even for Silicon Valley, with a bid at $16 billion.
• WhatsApp does not use wireless networks.
• WhatsApp has over 2 billion users worldwide.
• WhatsApp helped Facebook grow in developing markets where internet connectivity is lacking and where WhatsApp is widely used to communicate.

WhatsApp is an ad-free mobile application that allows users to send unlimited messages to contacts without using the wireless network or sustaining data fees. The app is free to download and is an alternative to the cell provider's traditional text messaging platform. The app was founded by Jan Koum and Brian Acton, two former Yahoo! executives.

When Facebook announced its plans to acquire WhatsApp in February 2014, WhatsApp's founders attached a purchase price of $16 billion: $4 billion in cash and $12 billion remaining in Facebook shares . This price tag is dwarfed by the actual price Facebook paid: $21.8 billion.

Facebook agreed to pay $19.6 billion—adding $3.6 billion to the original price as compensation to WhatsApp employees for staying on board at Facebook. However, Facebook share prices soared to $77.56 from $68 when the regulatory approval process concluded in October. By then, the agreed-upon 184 million Facebook shares inflated the final sale price by an additional $2.2 billion.  

WhatsApp's six-month revenue for the first half of 2014 totaled $15.9 million, and the company incurred a staggering net loss of $232.5 million. However, the majority of that loss was for share-based compensation.

WhatsApp is Zuckerberg's most significant acquisition and one of the most enormous Silicon Valley has ever seen. It is over 20 times larger than its Instagram acquisition, making quite the splash in 2012. That begs the $22 billion question: why did the social media giant break the bank to buy WhatsApp?

The answer is user growth. In 2014, over 450 million people used WhatsApp monthly, and the service added more than 1 million users per day. With 70% of WhatsApp users being active daily, the app was expected to quickly reach one billion users.

The app launched in 2009 and, as of 2020, had more than 2 billion users. As of 2020, Facebook had 2.8 billion  monthly active users . With a shared mission of enhancing global connectivity via internet services, the merging of forces will likely accelerate growth for both companies.

For Zuckerberg's company, user growth comes first and  monetization  later.

WhatsApp helped fuel Facebook's growth in developing markets where internet connectivity is sparse, and WhatsApp is widely used. Facebook then gained access to these mobile user bases. Connecting to WhatsApp users in these areas will also aid the Facebook Connectivity initiative; Meta CEO Mark Zuckerberg's plan to implement internet access to parts of the world not yet online.

However, the company does believe it will profit from WhatsApp down the line as phone calls become obsolete and mobile messages reign. This is why Zuckerberg spent one-tenth of his company's (then) market value to buy the text messaging app, nearly doubling Google's ( GOOG ) bid. In doing so, he successfully kept the company out of the hands of other tech rivals.

WhatsApp plays a significant role in global areas crucial to Meta's future growth. By putting monetization efforts on hold, Meta is focusing on the future of international, cross-platform communications. Through the acquisition of WhatsApp, the company is poised to reach billions of people, and Meta is sure to find a way to eventually cash in.

The New York Times. " For Google, a Toehold Into Goods for a Home ."

Apple, Inc. " Apple to Acquire Beats Music & Beats Electronics ."

Meta. " Facebook to Acquire WhatsApp ."

U.S. Securities and Exchange Commission. " WhatsApp Inc. Financial Statements, Years Ended December 31, 2013 and 2012 ," Page 4.

WhatsApp. " About WhatsApp ."

The New York Times. " In Facebook’s Deals for WhatsApp and Oculus, Lessons on Stock vs. Cash ."

U.S. Securities and Exchange Commission. " Facebook, Inc., Form 8-K/A, Date of Report: October 4, 2014 ," Pages 53, 59.

WhatsApp. " Two Billion Users -- Connecting the World Privately ."

Facebook Investor Relations. " Facebook Reports Fourth Quarter and Full Year 2020 Results ."

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Facebook's Acquisition of WhatsApp: The Rise of Intangibles (B)

By: Mark E. Haskins

Supplement to case UV7211. In the B case, Susan Shaw has finished her review of the Facebook/WhatsApp deal and recalls hearing about AT&T's acquisition of DIRECTV in July 2015. From a…

• Length: 6 page(s)
• Publication Date: Nov 9, 2016
• Discipline: Accounting
• Product #: UV7213-PDF-ENG

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Supplement to case UV7211. In the B case, Susan Shaw has finished her review of the Facebook/WhatsApp deal and recalls hearing about AT&T's acquisition of DIRECTV in July 2015. From a financial-statement-impact point of view, she wonders what the similarities and differences were between the Facebook/WhatsApp acquisition and the AT&T/DIRECTV deal.

Nov 9, 2016 (Revised: Mar 31, 2017)

Discipline:

Darden School of Business

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Facebook’s WhatsApp Acquisition Explained

N ow that Facebook is planning to acquire WhatsApp for $19 billion, perhaps your head is swimming with questions. Among them: How can I also make billions of dollars by selling my mobile app to Facebook? As someone who writes about technology for a living and who’s definitely not a billionaire, I can’t answer that for you. But I can help with some other things you might want to know:

What is WhatsApp?

It’s a messaging app you can use in place of your wireless carrier’s regular texting service. You enter your phone number and WhatsApp looks through your contact list for other people who are using the app. Then you can message those users all you want without limits or overage charges. The app is available on many platforms and is free to download and has no ads, but it costs $1 per year after the first year.

How popular is it?

Right now, WhatsApp has more than 450 million active users — meaning they use the service at least once a month — compared to 1.23 billion for Facebook. Those users send 500 million pictures back and forth per day, about 150 million more than Facebook.

How much money is $19 billion in the startup world, exactly?

A lot. My colleague Harry McCracken put together a chart of big startup acquisitions , and WhatsApp is the biggest. Most deals don’t come anywhere close. Bigger companies tend to change hands for a lot more money, however. For instance, Comcast wants to buy Time Warner Cable for $45 billion.

Is Facebook going to kill WhatsApp and/or ruin it with advertisements?

That’s not the plan. Facebook says WhatsApp will act like an independent company and stay in its own Mountain View, Calif. headquarters. The product will stay ad-free , and the two companies will focus on growth for the next few years. Then, they’ll figure out how to make money in some way that doesn’t involve shoveling ads into the app. (Harvesting all that sweet, sweet user data for targeted ads on Facebook or Instagram would be the safe bet, but more on that shortly.)

Is WhatsApp going to change at all, then?

WhatApp says nothing will change . Perhaps the $1 per year charge will go away at some point, given that Facebook says it’s not a big priority to expand subscriptions.

One potential downside: WhatsApp may become less inclined to work with companies that compete with Facebook, or vice versa. See, for reference, Instagram killing Twitter integration in 2012, several months after Twitter cut off its contact lists for Instagram users. We can only speculate that Facebook’s acquisition of Instagram — or Twitter’s previous failed acquisition — had something to do with the bad blood.

So why is Facebook spending so much money for WhatsApp?

This is the fun part, because every tech pundit thinks they’ve figured out the “real” reason for the acquisition, when in reality everyone’s just making educated guesses.

If there is a “real” answer, it’s probably a combination of several theories, some of which are related. Here’s a sampling:

• Facebook wants the photos. See the above statistics about how more people share photos on WhatsApp than on Facebook. It’s too big of an activity for Facebook not to own, says Sarah Lacy at PandoDaily .
• Facebook is becoming a social media conglomerate. Kara Swisher at Re/Code paints Facebook as a Disney-like media giant . It may not be able to own every popular service, but it can become the dominant player with different tools like Instagram and WhatsApp in its arsenal. Each one does things that the other property can’t.
• Facebook lives in fear of being disrupted in mobile. At this point, Facebook is pretty safe from becoming the next MySpace or Friendster, but it can’t risk losing peoples’ attention at the hands of newer, cooler apps, BuzzFeed’s John Herrman argues .
• Facebook needs to expand its Europe and emerging markets presence. As TechCrunch’s Josh Constine notes , WhatsApp is huge in developing countries. Facebook could also use WhatsApp to help bring more people online through subsidized Internet, which Facebook already offers in some countries . The acquisition is a shortcut to owning those growing markets.
• Facebook must buy its way into “ephemeral” and/or “dark social” communications. Just think about all the stuff you talk about, the photos you send and the links you share when you’re communicating privately — if not through WhatsApp then through something else like e-mail — instead of broadcasting to your Timeline. All that data is invisible to Facebook, unless you use Facebook Messenger. (And if Messenger was hugely popular, Facebook wouldn’t need WhatsApp.) WhatsApp can provide troves of data about the things we’re really interested in, which can then be used for targeted advertising on other Facebook properties. Alexis Madrigal’s 2012 post on Dark Social helps put this idea in context.

Oh, and Facebook’s official line is that it acquired WhatsApp to “make the world more open and connected,” which is probably as true as it is vague. Mark Zuckerberg always seems genuine in his world-changing ambitions, but there’s always the business side to keep in mind.

The overarching themes here are about attention and user data. WhatsApp has proven it can capture the former, and while Facebook says it has very little of the latter from WhatsApp, that can change, and messaging can become a rich data source for Facebook’s core advertising business. Perhaps that sounds scary, but it’s not much different from how Gmail works now .

How will we know when this starts happening? Just wait for the inevitable revision of privacy policies allowing WhatsApp and Facebook to freely share their data with one another.

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Blog > Predicting Innovation: Why Facebook/WhatsApp Merger Flunked

By Hasan Basri Cifci [1]

In the world of 2014, the Commission of Facebook/WhatsApp merger case [2] concluded that integration and interoperation of Facebook and WhatsApp were unfeasible. However, Facebook integrated its three subsidiaries (WhatsApp, Instagram, and Facebook) under its brand in 2019 and declared its plan to integrate their real-time messaging services. The Commission also concluded that integrating WhatsApp and Facebook and introducing online advertisements in WhatsApp would cause a change in the privacy policy of WhatsApp, which would be detrimental for user numbers. However, WhatsApp changed its privacy policy and shared data with Facebook in 2019 (the scope extended in 2021); and declared its plan to provide online advertisements in status function. Both changes did not significantly affect the number of WhatsApp users. [3] Last, the Commission did not consider that the collected data of WhatsApp might have a strengthening influence on Facebook’s market power. But such power became visible and raised serious concerns regarding the right to privacy today. Thus, all predictions that the Commission made melted away. Why?

Innovation was underestimated

Digital markets are markets where competitors compete not only in products but also in innovation. “Competition in innovation” is recognized under US Horizontal Merger Guidelines in 2010 and reflected in the EU merger system in 2011. [4] However, ex-ante merger control imposes a snapshot of technology in a certain period of dynamic market structure. Investigation of research and development processes when assessing post-transaction effects may ease to make better predictions. [5] In 2014, Facebook and WhatsApp were competitors who competed in innovation through their research and development processes. The Commission relied on the business plans of Facebook and WhatsApp, and that was misleading. Instead, the Commission should have given more attention to the dynamic nature of market structure and investigate the research and development agenda of Facebook and WhatsApp to illustrate their innovative behaviour.

Deviance in consumer behaviour had a lack of predictability

Digital markets are markets where competitors compete not only over products but also over privacy. Since having different privacy policies affects the value and preferability of the product, privacy is considered as a competitive determinant. [6] The Commission left concerns about privacy to the privacy-related control mechanisms, but firmly mentioned that change in privacy policy would not be the case for WhatsApp and Facebook since it was detrimental for user preferences. However, as mentioned above, changes in privacy policy did not significantly affect the number of WhatsApp users. [7] So, consumer behaviour may not progress as predicted, and deviances in consumer behaviour may restrict the extent of the possibility to predict post-transaction effects in digital markets. Then, it is a matter of whether the Commission could predict these deviances, even if privacy is accepted as a competition parameter.

In the Apple/Shazam case, the Commission analysed different datasets regarding consumer behaviour to have a comprehensive assessment of Shazam as a platform that directs personalised suggestions for its users. [8] The Commission also conducted a market investigation which comprises “licensing of music charts data at worldwide level”. [9]  So, the predictions based on datasets in the Apple/Shazam case were stronger, but not enough. Establishment of structural presumptions by case law regarding consumer responses and allowing competitors to present evidence that their case represents an exception of such presumption may be a suitable solution. [10] Though, in the Facebook/WhatsApp case, the Commission did not even touch upon what the potential changes in privacy policies were and how these changes would affect consumer behaviour.

Hierarchy in technological information was driven to misguide

The Commission relied on the technological information provided by Facebook itself, who was in the applicant position and asked for clearance. As its false-colour appeared after the decision, Facebook had misinformed the Commission regarding the potential integration and interoperability of Facebook and WhatsApp. [11] It is an example of an informational hierarchy between decision-makers in merger control and digital market companies. Since digital markets have an innovative and less predictable structure, experts in competition law may have difficulty in having comprehensive knowledge when compared to actual players. This hierarchy of information between them may restrict the extent of the possibility to predict post-transaction effects in digital markets. So, powerful evidence and diverse views may increase the quality of market investigation regarding technology in question and its potential developments. [12] In the Microsoft/GitHub case, the Commission made the same mistake when deciding that Microsoft would not prevent competition by opting to “refuse or degrade access to GitHub’s data”, [13] by relying on the current technological ability of Microsoft and business plans which had been produced by Microsoft itself. [14]

However, it is difficult to say that the Commission deserves all the blame because failures in prediction are natural byproducts of digital markets. The obscurity increases while the innovative nature of the market increases. But merger control functions better when the obscurity decreases. So, in digital markets, ex-ante merger control may lose its determinative power if it does not employ better methods to fight against such sightlessness. The Commission may consider innovation as an additional parameter of competition in relevant markets, rely on research and development agendas of the parties, employ alternative methods as innovative as digital markets, ask stronger evidence from the parties regarding demand-side responses, consider not only claims of the parties but also various sources of evidence, such as datasets, exchange of views regarding the technology in question.

[1] Research Assistant, Maltepe University, [email protected] . This blog post is an updated summary of a research paper assigned by Dr. Zeynep Ayata during my LLM studies at Koc University.

[2] European Commission, Case No COMP/M.7217.

[3] Iqbal, “WhatsApp Revenue and Usage Statistics (2020)”, https://www.businessofapps.com/data/whatsapp-statistics/ , accessed 10 Jan 2021.

[4] Graef, Inge/Wahyuningtyas, Sih Yuliana/Valcke, Peggy, “How Google and others upset competition analysis: disruptive innovation and European competition law”, 25th European Regional Conference of the International Telecommunications Society, Belgium, 2014, p.12.

[5] Graef/Wahyuningtyas/Valcke, p.5.

[6] Eseyas, “Competition in Dissimilarity: Lessons in Privacy from the Facebook/WhatsApp Merger”, Competition Policy International Chronicle, August 2017, pp.1-8, p.2.

[7] Iqbal, “WhatsApp Revenue and Usage Statistics (2020)”, https://www.businessofapps.com/data/whatsapp-statistics/ , accessed 10 Jan 2021.

[8] European Commission, Case M.8788, Apple/Shazam para.320.

[9] Apple/Shazam para.163.

[10] Shapiro, “Protecting Competition in the American Economy: Merger Control, Tech Titans, Labor Markets”, Journal of Economic Perspectives, (draft paper), p.8.

[11] Press Release by European Commission in 18 May 2017.

[12] Shapiro, p.8.

[13] European Commission, Case M.8994, Microsoft/GitHub para.139 (emphasis added).

[14] See “no ability or incentive” in Microsoft/GitHub para.114.

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Federal court dismisses FTC’s bid to unwind Instagram from Facebook

The decision deals a striking blow to attempts to break up big tech.

By Makena Kelly and Russell Brandom

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On Monday, a US District Court dealt a huge blow to the federal government’s antitrust case against Facebook by dismissing a complaint filed against the company by the Federal Trade Commission. The lawsuit, filed late last year , sought to unwind Facebook’s acquisitions of Instagram and WhatsApp. The judge also dismissed an associated case filed by a group of state attorneys general.

In its initial complaint , the FTC alleged that Facebook violated federal antitrust laws by purchasing a would-be competitor in the social media market. But in his decision to dismiss the complaint Monday, Judge James E. Boasberg wrote that the FTC offered insufficient evidence for its central claim — that Facebook wields monopoly power.

“This case involves no ordinary or intuitive market”

“The FTC has failed to plead enough facts to plausibly establish a necessary element of all of its Section 2 claims —namely, that Facebook has monopoly power in the market for Personal Social Networking (PSN) Services,” Boasberg wrote. “The complaint contains nothing on that score save the naked allegation that the company has had and still has a ‘dominant share of th[at] market (in excess of 60%).’”

Boasberg also dismissed the claims against Facebook’s interoperability restrictions, finding that the policies were implemented too long ago to be subject to FTC action.

Facebook did not immediately respond to a request for comment from The Verge . However, the company’s stock surged in response to the dismissal, clearing $1 trillion in market capitalization for the first time in Facebook history.

The ruling also struck down a parallel anti-monopoly case against Facebook filed by a coalition of state attorneys general. Nearly every state attorney general signed onto a lawsuit against Facebook in December, making similar allegations as the FTC case. But Boasberg dismissed that case in an accompanying decision on Monday, holding that a specific civil law doctrine prevented the coalition from challenging acquisitions settled so many years in the past. 

Notably, Judge Boasberg left room for the FTC to revise its case and unwind past Facebook mergers. The commission has until July 29th to file a new complaint outlining its argument regarding Facebook’s market dominance, and the judge made it clear that the FTC’s case was not affected by the civil doctrine that doomed the state attorneys general.

“An injunction under Section 13(b) is a theoretically available remedy in a Section 2 challenge to long-ago mergers,” Boasberg wrote in the FTC opinion, “so long as the defendant still holds the purchased assets or stock, as is the case here.”

Boasberg also noted the inherent difficulty of establishing monopoly power for a free online service, as the FTC is now required to do. “This case involves no ordinary or intuitive market,” Boasberg’s opinion reads. “Rather, PSN [Personal Social Networking] services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e. , which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear.”

The court’s dismissal could provoke more aggressive action from the legislature, as Congress is currently pushing forward on sweeping tech antitrust reforms. Last week, the House Judiciary Committee approved a slate of bills targeting Big Tech’s market power, including bans on large mergers and new interoperability requirements. All six measures are headed to the House floor and parallel bills are expected to be introduced in the Senate over the coming weeks.

“Today’s development in the FTC’s case against Facebook shows that antitrust reform is urgently needed,” Rep. Ken Buck (R-CO), ranking member on the House Judiciary Committee’s antitrust subcommittee, said in a tweet Monday . “Congress needs to provide additional tools and resources to our antitrust enforcers to go after Big Tech companies engaging in anticompetitive conduct.”

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The EU’s Traditional Analysis of the Facebook, WhatsApp Deal – Do We Like it?

The European Commission unconditionally cleared the acquisition of WhatsApp by Facebook on 3 October having concluded that Facebook Messenger and WhatsApp were not close competitors and that users would still have plenty of alternative messenger and social network services to choose from after the merger.  The decision means that Facebook has the EU’s green light to complete its merger of the $19 billion deal.

In reaching this conclusion, the investigation focussed on three services markets; consumer communications, social networking, and online advertising.  

In relation to consumer communications services, the Commission found that the two messenger services offered by Facebook and WhatsApp were used in different ways; WhatsApp is used only on smartphones and accessed via phone numbers whereas Facebook messenger could be used on both fixed as well as on mobile devices and users needed a Facebook profile to connect. Since consumers often use more than one messaging service and the Commission considered the market to be dynamic and fast moving, it was found unlikely that the concentration would have a significant effect.

The merger’s potential impact on the market for social networking services was also considered and found to be continuously evolving. While arguably Facebook and WhatsApp were already competitors, since the Facebook service was much richer with a larger range of facilities and features than the WhatsApp networking experience, they were viewed as, at best, distant competitors. The fact that there were other competing apps and the user base of Facebook and WhatsApp already overlapped led the Commission to conclude that the social networking market was unlikely to be negatively affected by the merger. 

Since WhatsApp does not currently display advertising, it was found that the merger would be unlikely to affect the online advertising market. The Commission made a cursory reference to the possibility that Facebook could introduce advertising on WhatsApp or collect and use data from WhatsApp users to enhance its own data portfolio and targeting, but both possibilities were dismissed as being largely irrelevant to the competition issues at stake. In doing so, the Commission commented that there were a sufficient number of alternative providers to Facebook that supply targeted advertising and much of the data used is not exclusively held by Facebook. They also swept aside data privacy concerns raised about the increased concentration of data held by Facebook, on the basis that these were data protection and not competition issues.

This decision was taken against a background of approval in the US. US antitrust authorities already cleared the merger in April on condition that WhatsApp would be subject to Facebook’s 2012 agreement with the FTC in which Facebook is required to give consumers notice and obtain consent before sharing information and to maintain a privacy program. This is hardly a major condition from the perspective of EU law, since such requirements are in any event obligatory under EU Data Protection rules. However, it did require WhatsApp to continue to apply its privacy policy which involved not using consumers’ data for targeted ads, although it is not clear that this would necessarily prevent Facebook using the data collected from WhatsApp for its own targeted ads.

This merger inquiry was an opportunity for the Commission to deepen its understanding and analysis of how competition law will apply to social media, consumer facing digital services and the role of large US technology companies with major online business presence. It also provided a case study in looking at the role that data and data concentration plays in altering market structures and dynamics in online, mobile and digital businesses particularly those with consumer network effects, a key issue in understanding who holds the power in these markets.  

Yet the Commission appears to have analysed this case as if the markets involved were just the same as any traditional services market, focusing on actual horizontal competitive services as the key to determining whether the acquisition could impact competition.  In consumer facing digital markets, with huge operators already holding key market positions, access to large databases of personal information based on networks of hundreds of millions of users probably represents the price of critical market entry (ie the type of entry that could really pose a competitive threat to the status quo). Combinations of large networks which, at the point of merger, are only distant competitors of consumer facing services may, due to the information they hold or their ability to collect such information, be potential competitors of extraordinary potential force. If entities spend years creating those conditions (supported by minimal income), only so that they can be sold off to powerful incumbents before they use the base created to start to compete, how will a truly competitive market emerge? When billions of dollars are paid for a business which has a relatively modest income stream, what might the strategic objective of the acquirer really be?

The themes of network power and priority access to market critical mass data continue to emerge in parallel competition investigations in these markets. In light of the questions the Commission is grappling with over the various Google antitrust investigations and complaints and the recent barrage of criticism of their proposed settlement agreement with Google, it will be interesting to see whether this decision also stands the test of time.

Susannah Sheppard is the founding partner of Sheppard / Co, a boutique competition law practice.

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Facebook completes whatsapp acquisition, deal worth $22b.

Facebook Inc. ( FB ) recently completed the acquisition of Mountain View, California-based WhatsApp. The deal, signed in February, was recently approved by the European Union ( EU ). Per Reuters, the transaction is currently worth approximately $22 billion, up an additional $3 billion due to about 14% increase in Facebook’s share price over the last 9 months. Facebook paid $4.59 billion in cash and 178 million shares of its stock for WhatsApp, which currently has more than 600 million monthly users and 70 employees. The social network also granted 46 million of grants in restricted stock units (RSUs) for WhatsApp employees that will vest over a four-year period. WhatsApp founder Jan Koum will receive approximately $2 billion in stock. He will continue to serve as the Chief Executive of WhatsApp and earn $1 salary similar to Facebook’s Mark Zuckerberg. To date, WhatsApp is Facebook’s biggest acquisition, reflecting the company’s eagerness to maintain its position as the leading social network platform. The buyout not only expands Facebook’s mobile product line-up but also adds a user base, which is predominantly young. Most significantly, the acquisition eliminated Facebook’s fastest growing competitor in terms of user addition. The acquisition also improved Facebook’s competitive position over the likes of Google ( GOOGL ) and Twitter ( TWTR ). Per Facebook, the text-based messaging service provider is adding 1 million users on a daily basis, which will help it to reach the magic 1 billion mark by mid-2015. This will make WhatsApp bigger than the world’s largest carrier, China Mobile, in terms of users. WhatsApp’s soaring popularity among users (particularly youngsters) primarily lies in the fact that it does not threaten their privacy. Unlike Facebook, the messaging app does not collect information like name, gender, address or age. The company also does not promote games or provide e-Commerce services as offered by some of its peers. However, how Facebook plans to make money off the deal is unclear. It has agreed to the founders’ wishes of letting the platform run independently and ad-free in return for a subscription of 99 cents a year. Hence, revenue growth at the moment is totally dependent on user growth. WhatsApp is set to offer free voice-call services that will initially be available on iOS and Android and will gradually be extended to Windows and Blackberry users. However, this will intensify competition for telecom companies such as AT&T ( T ). Nevertheless, the takeover will help Facebook improve its penetration in Europe, India and Latin America, where WhatsApp has a strong presence. Facebook intends to use the services of Whatsapp in its internet.org program. The rapid growth of WhatsApp in these regions is expected to be a key growth catalyst for program going forward. Moreover, Facebook’s growing mobile user base, Instagram’s increasing popularity, frequent launch of new products and new tools for advertisers will boost the company’s top line and profitability in the long run. Currently, Facebook has a Zacks Rank #1 (Strong Buy).

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