Disruptive innovation – Is it time for a detailed competition scrutiny yet?

In his book, Digital Darwinism: Survival of the Fittest in the Age of Business Disruption, Tom Goodwin stated that “The barrier to disruptive innovation often isn’t knowing enough—it’s knowing way too much about how things have always been”. The buzz expression “disruptive innovation” is seemingly grabbing a large chunk of space in leading dailies and media journals. Ride-hailing apps such as Ola and Uber, online marketplaces such as Amazon and Flipkart, instant communication apps such as WhatsApp, and WeChat, and online hospitality platforms such as Airbnb, etc. which have very swiftly become ubiquitous in our lives, are active examples of disruptive innovation. But what does this pervasive term really mean?

Available literature on the subject defines disruptive innovation to be characterised by the entry of a new product/service in a market, which, in addition to meeting the basic demands of an already existent value network, also brings in certain additional value, thereby displacing the existent competition and the existent value network.

These disruptive innovators typically utilise “innovation” as a key parameter, and, thus, are also able to create a large consumer base as well as gather enormous amounts of consumer data for their product or service, in a short duration of time. The pertinent question that is therefore being hotly debated internationally is whether such collection, access and use of consumer data by digital players and in particular, by disruptive innovators can confer market power on them enabling them to abuse such power in the market?

Referred to as “big data”, this information is largely collected from consumers or by studying consumer behaviour on the internet and is then processed by self-learning computer algorithms to create highly specialised consumer information, which is then used to improve the quality of existing products/services or to launch new products/services, in the market. As an example, every “keyword” typed on Amazon’s search option is collected and analysed to study the shopping/ viewing pattern of the consumer. Similarly, for a ride-hailing player, such as Uber/Ola Cabs, it could be the frequency of certain travel routes of a user, which becomes vital data from the viewpoint of the service provider.

Last year, the European Commission fined Facebook for failing to disclose that it would be able to establish reliable automated matching between Facebook users’ accounts and WhatsApp users’ accounts, after their merger. Another curious issue that the acquisition of WhatsApp by Facebook has raised is whether the current turnover thresholds in merger control accurately address the competition concerns arising from acquisitions/ mergers of low turnover yet data-rich companies? The enigma is amplified when one discovers that while Facebook’s acquisition ofWhatsApp did not trip relevant thresholds triggering required antitrust approvals, Facebook still paid a whopping consideration of $19 billion for it! Surely, one wonders whether the purchase consideration could be perceived to indicate the existing or future value Facebook anticipated from the acquisition.

When looking at the Indian competition landscape, the wave of digitisation and continuously evolving technology has not only impacted the nature of markets and consumer behaviour but has also revealed the significance of “innovation” in ascertaining the degree of competition in markets, in both competition enforcement and merger control.

A quick glance at the jurisprudential trend of Competition Commission of India’s (CCI's) orders in digital and technology-driven markets shows that barring certain cases, the regulator has largely adopted a non-interventionist approach in its assessment of anti-competitive harm and has recognised the significance of innovation in nascent markets as a key competitive force. In the e-commerce space, the CCI has consistently held that online marketplaces such as Amazon, Flipkart and other B2C platforms, and offline marketplaces such as traditional brick and mortar stores are merely two different distribution channels that are still part of the same market for retail trade.

In the market for instant communication apps, the CCI rejected the allegation of predatory pricing against WhatsApp and held that, although WhatsApp enjoyed a dominant position in the relevant market, it did not abuse its dominance by providing free of cost services to users and noted that it was industry practice to provide the service of instant communication apps free of cost. Similarly, in the Ola Cabs case, the CCI observed that in hi-tech markets, high market shares in the early years of introduction of a new technology was only transient and could not be a relied upon to establish dominance of the innovator in the relevant market.

In relation to the interface between competition rules and data protection rules, although the CCI in the WhatsApp order had observed that any allegation of breach of the Information Technology Act, 2000, fell outside its domain, it remains to be seen if the CCI will consider privacy-related concerns in its assessment of anti-competitive harm, particularly in cases where consumers regard the privacy element as an essential quality parameter of the entity at issue or when ‘access to private data’ has a direct link to the dominance of that entity.

On the same note, in the context of merger control, while the Indian competition regime, at present, does not empower the CCI to evaluate transactions which do not breach the prescribed jurisdictional thresholds, the policymakers are attempting to address this, one could argue, lacuna in the context of hi-tech markets by proposing in the recently introduced Draft National Policy Framework on e-commerce that the CCI may consider amending the threshold values to bring competition-distorting mergers in the e-commerce space, under its radar.

Globally, Germany has already amended its law and has added a transaction value threshold for merger notifications, which is based on the value of deal. Austria has also added the transaction value threshold to its merger control guidelines, which will come into force in November 2018.

The progressive surge in M&A activity in technology-driven markets has raised competition law and data privacy concerns globally. Access to highly specialised consumer and other forms of data by hi-tech companies has condensed the interface of competition rules and data protection rules and has shown that although disruptive innovation in digital markets may appear to have faced moderate scrutiny with a few notable exceptions by antitrust regulators, it has not completely skipped the radar of full-fledged antitrust scrutiny. In India too, the CCI has consistently appreciated the nuances and the nascency of digital markets and the vital role that innovation plays in the development of new business models and products/services.

However, with the growing international upheaval by traditional players in the market and growing network complexities of the digital world, the CCI could follow suit soon enough and closely scrutinise the competition concerns arising in the digital space, including the potential anti-competitive effects of access to big data by digital players.

Views are personal.

Arshad (Paku) Khan is executive director and Anisha Chand is principal associate at Khaitan & Co.