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Facebook Consumes WhatsApp

About The Author

Jade Rigby (Writer)

Jade is a third year Law student at Newcastle University. She is currently completely an Erasmus year abroad at Universitat Pompeu Fabra in Barcelona, Spain, and will return to Newcastle in 2015. Jade is predominantly interested in commercial law, but also writes on criminal and private law topics.

Over the past 15 years, the technology industry has exploded. Reports suggest that 7 in 10 people in the UK now own a smartphone. It is not just the younger generation either, more than 50% of 54 – 65-year-olds are smartphone owners.

The way we use technology has also drastically altered. Gadgets and gismos are not just for James Bond anymore. According to The Guardian, we are now raising ‘a generation of digital natives’. This follows from reports from Ofcom that 6-year-olds understand digital technology better than adults. Youngsters are even able to navigate smartphones or tablets before they are able to talk.

This does not mean, however, that society has lost the ability to communicate. Indeed, it seems that now, more than ever before, we value the opportunity to get in touch with friends, family and colleagues. There has been incredible growth in the social networking sector of the technology industry, with Twitter and Facebook as some of the most famous examples.

On Friday, 3rd October 2014, the European Commission confirmed its approval of one of the biggest acquisitions in social networking history. Facebook Inc. has received the European green light to commence with the acquisition of mobile messaging application WhatsApp. 

Competition Law in the EU

Over 110 jurisdictions worldwide have some form of competition law. In the EU, competition law 'aims to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such'. The European Commission is responsible for investigating competition law concerns in the EU.

The Facebook-WhatsApp Acquisition

The European Commission’s Press Release states:

Facebook (via Facebook Messenger) and WhatsApp both offer applications for smartphones (so-called "apps") which allow consumers to communicate by sending text, photo, voice and video messages. The Commission found that Facebook Messenger and WhatsApp are not close competitors and that consumers would continue to have a wide choice of alternative consumer communications apps after the transaction. Although consumer communications apps are characterised by network effects, the investigation showed that the merged entity would continue to face sufficient competition after the merger.

As a frequent user of social networking applications, I have to say that, on the surface, this appears to be a rather artificial argument. As the Commission has stated, both enable users to communicate with their contacts through a variety of media. It would appear, therefore, that the two applications were competition to provide a similar service.

Additionally, the merger could have some significant effects for European competition. According to the Wall Street Journal:

Facebook’s social networking platform has 1.3 billion users world-wide, 300 million of which are also users of the Facebook Messenger app. Mountain View, Calif.-based WhatsApp, which provides a kind of low-cost replacement for text messaging, has 600 million users world-wide.

You read that right: 1.3 billion users, and 600 million users. Although these are worldwide figures, we can get a rough idea of the scale of both applications. Merging the user-base of both applications could involve a significant number of social networkers here in Europe, and one has to question whether, in reality, this will serve to push any competitors out of the digital picture.

In order to analyse the European Commission’s decision, this article with investigate the acquisition from a three-pronged perspective, based on the areas that the Commission also focused their enquiries:

  1. Consumer communications services;
  2. Social networking service; and
  3. Online advertising services.

I) Consumer Communications Services

Let us begin with the Commission’s stance on this area. It is important to note that the Commission limited its assessment on apps for smartphones, as WhatsApp is not available for other devices.

Although many of social network users would probably consider this rather artificial, considering the fact that Facebook has the technology to provide WhatsApp to consumers on a range of devices, this is a logical starting point because, at the moment, WhatsApp can only compete at one level.

The Commission found that Facebook Messenger and WhatsApp are not close competitors for the following reasons:

  1. The two apps are accessed differently: ‘[f]or WhatsApp, access to the service is provided through phone numbers while for Facebook Messenger, a Facebook profile is required. Users seem to use the two apps in different ways and many of them use the two apps simultaneously on the same mobile handset’;
  2. The Consumer Communications Services market is very “dynamic”, and there are other apps available for consumers. The market itself ‘is fast growing and characterised by short innovation cycles in which market positions are often reshuffled. Moreover, launching a new app is fairly easy and does not require significant time and investment’; and
  3. ‘Customers can and do use multiple apps at the same time and can easily switch from one to another’.

There are a few objections that should be raised here.

Firstly, WhatsApp users have profiles. Granted, they may not be as advanced as those on the Facebook network, but that does not mean that they are entirely different. A WhatsApp profile includes the user’s picture and a “status”, a public message which can be updated at any time. As many people know, Facebook profiles also consist of profile pictures and the ability to write statuses. It is not entirely apparent, therefore, that users do indeed use the two apps in different ways.

Moreover, one could argue that the Commission’s outlook on relevant market competition has ignored domineering moves taken by Facebook over the last few years. Facebook Messenger is a stand-alone application, although a Facebook profile is required in order to use it. For Timothy Stenovec, it was clear that “Facebook was on a mission to dominate the time you spend on your phone… and if it can't take over your entire phone, it is going to bombard you with different apps until the effect is more or less the same.” The risk here is that, now that Facebook has diversified its offerings by recreating Facebook Messenger as a stand-alone app, it will eventually absorb competitors from a wide spectrum of the online social networking sector.

The dynamic nature of the market has, however, demonstrated that innovation will define market boundaries. Relatively new applications such as Snapchat and Tinder have also broken into the communications industry, each with novel forms of communicating, so it is not certain that the Facebook-WhatsApp acquisition will dominate the field simply due to their larger user base.

Additionally, the issue of network effects has the potential to be a significant problem for European competition. The Commission considered that the ‘[t]he consumer communications apps market is characterised by network effects’. ‘Network effects’ is a particular market trend, wherein the value of a service to its users increases with the number of other users. The Commission noted that ‘[n]etwork effects may allow the entity which enjoys a large network to keep its competitors out of the market’. As previously discussed, the vast size of the Facebook and WhatsApp user bases, which, when combined, could render other apps largely obsolete. Indeed, according to Forbes.com, Facebook founder Mark Zuckerberg has confirmed that the value in the WhatsApp acquisition is largely due to ‘how few services there are with the potential to attract 1 billion users’.

II) Social Networking Service

This second area of investigation is related to the first, as the ability to communicate with others and the concept of social networking online have gone hand-in-hand for some time now. Indeed, even without the ability to privately message others, consumers have long been able to write comments and post them on to the profile pages of other users on websites such as MySpace and Bebo.

The Commission took a pragmatic view of this, which is commendable given the fast-changing nature of online social evolution:

As regards social networking services, the market investigation showed that their boundaries are continuously evolving.

Although, as discussed before, WhatsApp users can have profiles and send messages, ‘the Commission found that the parties are, if anything, distant competitors in this area, in particular given a substantially richer experience offered by Facebook’.

There have been concerns, however, that the acquisition could give the companies ‘excessive market power’ because of their respective influence over different, but closely-related, spheres of the social networking service market. In defence, the Commission again drew on the idea that users often had multiple applications for communications and social networking, hence ‘the net gain in terms of new members of the social network would be limited, since the user base of WhatsApp already overlaps to a significant extent with that of Facebook’.

What is particularly striking here is that the foundation of the Commission’s decision is rooted in a concern for the protection of consumer choice. This is evident from the consequentialist stance of the decision; the Commission have focused on the practical effects of the acquisition, rather than purely speculating on innovation in the market. That is not to say that the Commission has ignored the fact that the social networking market is extremely dynamic. Indeed, as we have seen, the Commission have considered this a fundamental aspect of their decision, but they have also considered the immediate problems that could arise for European competition.

Additionally, we should praise the Commission’s evaluation of this area because it has recognised the fact that social networking takes a variety of forms. Rather than using a strict definition of ‘social networking services’, the Commission has embraced a holistic interpretation. Significantly, this indicates that their decision takes into account a wider variety of online communities. This ensures that the Commission has approved the acquisition in light of a full, contextual analysis:

Hence, no matter what the precise boundaries of the market for social networking services are and whether or not WhatsApp is considered a social network, competition is unlikely to be negatively affected by the merger for such services.

III) Online Advertising Services

This is the area which has caused the most concern amongst Facebook and WhatsApp competitors.

As many of you may have already seen, ironically, most probably from videos and comments shared on Facebook itself, there has been a lot of controversy recently surrounding Facebook’s use of consumers’ personal data. According to TIME, Facebook uses data from its users in order to tailor advertisements which appear on users’ homepages. The rationale behind this move is that particular advertisements will appeal to people who have searched for certain things, or who have posted statuses or comments about particular products.

According to Facebook:

Your ad preferences are based on information you’ve shared with Facebook, Pages you like or engage with, ads you click on, apps and websites you use, and information from our data providers and advertisers.

The idea is that the advertisements will be more successful if targeted at particular audiences. Users are even encouraged to ‘see more interesting and useful ads on Facebook’ by updating their ad preferences to reflect things they care about. The issues surrounding privacy of data are not relevant in this context, but readers can find out more here.

In relation to the WhatsApp acquisition, competitors are concerned that Facebook’s use of personal data could distort online advertising competition. The Commission examined the possibility that:

Facebook could (i) introduce advertising on WhatsApp, and/or (ii) use WhatsApp as a potential source of user data for improving the targeting of Facebook's advertisements.

Currently, WhatsApp provides an ad-free service to its users. Facebook Messenger is also ad-free at the time of writing, but the danger here is that this will change. Facebook may utilise its access to personal data and preferences in order to attract new online advertising business. On Out-Law.com, a legal news website operated by the firm Pinsent Masons, Competition expert Sammy Kalmanowicz, of the same firm, discussed how the use of personal data could have a huge impact on competition law:

Harnessing personal data to personalise services to consumers and better target advertising is seen by many organisations as an opportunity to differentiate their businesses from those of rivals … Potential competition law issues arise if rivals are shut out from being able to access the aggregated data, do not have access to a similar bank of data or have to pay a premium for access to that information. In some cases, a merger of powerful data collectors could create a position of dominance in a market for the merged business.

The Commission, however, is convinced that:

[The acquisition will not] raise competition concerns. This is because after the merger, there will continue to be a sufficient number of alternative providers to Facebook for the supply of targeted advertising, and a large amount of internet user data that are valuable for advertising purposes are not within Facebook's exclusive control.

The Commission are correct in arguing that other companies can utilise personal data to provide selective advertising. Facebook is not alone in this regard: ‘companies make millions by trading in your personal information from social media, browsing history and other online activity.

For a better insight into how companies use your personal data for advertising purposes, please see ‘Google to get a slap on the wrist for ‘stalking adverts’? by Chris Bridges.

Reporting for the BBC, Richard Taylor, a Technology Correspondent for North America, argues that WhatsApp has given Facebook ‘inroads into international markets and, as importantly, to a younger demographic. But what is less clear is whether the finances will add up in the long term’.

Friction in this business relationship could appear because of the online advertising market. This is because ‘adverts are pivotal to Facebook's own business model, and the pressure for it to monetise its new WhatsApp user base in the same way may prove too tempting to resist’.

Ultimately, it appears that the Commission has taken a logical decision by approving the Facebook-WhatsApp acquisition. Indeed, in light of the previous analysis, we may go so far as to commend the pragmatic and holistic nature of the decision. However, concerns over online advertising appear to be well founded. If WhatsApp proves to be a significant gateway into new target groups for Facebook, then it would be feasible for the business to take a dominant position. Crucially, the industry must continue to evolve and innovate in order to keep Facebook on its toes.

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Tagged: Commercial Law, Competition, European Union, Technology

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