Facebook’s German antitrust probe hinges on market power of network effects

5 February 2018 10:38am
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8 January 2018. By Matthew Newman.

The German competition authority’s antitrust case against Facebook will hinge on whether the platform’s powerful network effects give it market dominance. Only if that is established will the authority be able to build a ground-breaking case at the intersection of data-protection and competition law.

In late December, the Bundeskartellamt sent Facebook its preliminary concerns on how the company gathers data from social networking services WhatsApp and Instagram, which it owns, as well as third-party apps and websites.

Facebook gathers data from these sites without the user's knowledge or agreement, which is a breach of German data-protection rules, the national authority said. The company then abuses its market power by merging these data with information gleaned from users’ Facebook accounts, according to the Bundeskartellamt’s preliminary view.

The agency expects to make a final decision “before early summer” this year.

Network effects

The Bundeskartellamt says users are “practically locked in” through Facebook’s network effects.

But it will have to be very clear about what it means by network effects, and how they prove market dominance. Most critically, it will have to justify its position that Facebook doesn’t face effective competition from myriad other social-network platforms, including Snapchat, YouTube, Flickr, Twitter, Google+, Pinterest and others.

The issue is crucial for the investigation because the authority needs to prove that Facebook has such a dominant position in the German social-network market that it gives its users “no option” but to consent to their data being used.

It comes down to the authority’s contention that there is “limited” scope for users to substitute rival social networks in Germany, because of Facebook’s “identity-based network effects.”

In other words, Facebook is the only show in town because it already has 30 million users in Germany, out of a population of about 80 million. That means Germans who want to “find the persons they want to be in contact with” have no choice besides Facebook, the Bundeskartellamt says.

Consumers may use other professional social networks, such as LinkedIn or Xing, as well as messaging services such as Snapchat, but these services don’t fulfill the same function as Facebook and its subsidiaries, according to the German authority.

“Even though these services are in parts competitive substitutes for Facebook, from the users' perspective they serve a complementary need,” the authority said.

True dominance?

Facebook has contested the German authority’s fundamental premise in the probe. The social network argues that its popularity in Germany doesn't mean that it has market dominance, and it’s just “one part of how people interact.”

A truly dominant company could rest on its laurels and never improve its service, Facebook said in a blog post last month. By contrast, Facebook must constantly enhance its offering, by upgrading its reliability or giving people better controls, or risk losing people to other platforms — as was the fate of other tech companies, most notably social network MySpace.

Facebook argues that, while it has many German users, they don’t only use its service: they use many other free apps to network and communicate. The average person uses seven different social communication apps or services to send photos or videos. About half of Germany's Internet users don’t use Facebook at all, the company says.

The German probe will also depend on the definition of the relevant market. Should all social networks be included as rivals to Facebook? Or, is Facebook’s dominance so clear with its massive market share that consumers really are “locked in” and find it “extremely difficult” to switch to one of Facebook’s competitors, as the German authority says?

Confluence of laws

The probe is one of the first cases in which complex issues involving Big Data and competition law are colliding.

If the German authority can indeed prove that Facebook is dominant, then it might be able to argue that it abuses its market power by requiring its users to grant it “extensive permission” to use their personal data. This conditionality could be seen as Facebook imposing “exploitative business terms” on its users, in violation of German competition law.

The alleged consumer harm is that users no longer have control over how their personal data is used. This would be a breach covered by the country’s data-protection rules.

Competition law might cover Facebook’s ability to merge data from WhatsApp, Instagram and third-party sites with the user’s Facebook profile, giving it a clear advantage over its rivals in attracting advertisers. Blending user profiles allows it to improve its targeted advertising.

So, in an age when data is the new currency, Facebook’s hoovering of personal data might not only violate users’ constitutional right of “informational self-determination” — as the Bundeskartellamt says — but could also crimp competition by giving the company an unfair leg-up in the fight for advertisers’ budgets.

But before it tackles that, the Bundeskartellamt will have to prove that Facebook is dominant in the first instance. Without that foundation, it will be hard to build a case at all.