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Facebook WhatsApp Bid Seen Avoiding U.S. Antitrust Case

Facebook Inc. (FB)’s purchase of messaging startup WhatsApp Inc., which carries a $2 billion breakup fee, will probably avoid a U.S. antitrust challenge because of the dynamic market for mobile applications.

“It seems like a stretch to me to find some kind of competition issues,” Harry First, a professor at New York University School of Law, said in an interview. “This is not the only message-sharing app for free. How hard is it to start up another one?”

Facebook, the world’s largest social network, is acquiring Mountain View, California-based WhatsApp for $19 billion to expand its reach among users of mobile devices. The buyer is counting on applications beyond its main social network, such as messaging and news, to attract more consumers on smartphones and tablets.

Facebook, based in Menlo Park, California, agreed to pay $1 billion in cash and $1 billion in company stock “in the event of termination of the merger agreement under certain circumstances principally related to a failure to obtain required regulatory approvals,” according to a statement yesterday.

“The breakup fee is huge. What are they worried about?” First said. “The only thing I can think might be a potential problem is what the future plans are to invade each other’s turf.”

Photographer: Brent Lewin/Bloomberg

The WhatsApp Inc. mobile-messaging application WhatsApp and the Facebook Inc. application are see through a camera lens placed on top of an Apple Inc. iPhone in this arranged photograph taken in Hong Kong. Close

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Photographer: Brent Lewin/Bloomberg

The WhatsApp Inc. mobile-messaging application WhatsApp and the Facebook Inc. application are see through a camera lens placed on top of an Apple Inc. iPhone in this arranged photograph taken in Hong Kong.

The Justice Department and the Federal Trade Commission share antitrust jurisdiction in the U.S., reviewing whether mergers are anticompetitive and whether dominant companies are abusing their market power.

Instagram Deal

Facebook’s acquisition of photo-sharing site Instagram Inc. received an extended review by the FTC before the agency approved the deal in August 2012. It also examined Google Inc.’s purchase of mapping application Waze last year.

The FTC will probably review the WhatsApp transaction based on the expertise acquired from earlier reviews of Facebook’s business, said Maurice Stucke, a lawyer at GeyerGorey LLP and a law professor at the University of Tennessee.

The European Union’s antitrust watchdog hasn’t seen details of Facebook’s plan yet and doesn’t know “whether this will be subject to merger control” in the 28-nation bloc, EU Competition Commissioner Joaquin Almunia told reporters in Brussels today.

Almunia’s department at the Brussels-based European Commission has never grappled with privacy issues in its merger control.

Intense Scrutiny

Facebook has come under intense scrutiny by privacy regulators and consumer groups worldwide over how it uses people’s information without their consent.

It was forced in 2012 to delete data collected for its facial recognition program following a probe in Europe led by Ireland’s privacy regulator, which oversees the company because its European headquarters are in Dublin.

The deal doesn’t create an immediate privacy concern, the Irish office said in an e-mail.

Data protection regulators don’t have the power to bloc a merger and also have only limited authority to sanction companies for privacy violations under current EU rules.

There are “no direct implications for us at present as we understand the company will continue to operate as a separate entity with no change -- at least for the present -- in jurisdiction for data protection purposes,” the Irish authority said.

Consent Decree

Facebook entered a 20-year consent decree with the FTC in 2011 to resolve complaints it failed to protect users’ privacy or disclose how their data could be used. The settlement requires Facebook to get clear consent from users before sharing material and calls for independent reviews of the company’s privacy practices.

Antitrust regulators will study the extent of competition between WhatsApp’s service and Facebook’s own application, Facebook Messenger, and whether the deal would give Facebook undue control of the messaging market, said Seth Bloom, founder of Bloom Strategic Counsel in Washington and a former general counsel of the U.S. Senate Antitrust Subcommittee.

“The thing about this market is there is rapid technological change and frequent new entry,” Bloom said in a phone interview. “It’s hard to say anybody has a durable market share.”

Another issue for antitrust regulators will be whether the acquisition increases Facebook’s market power and thwarts potential competition by boosting any network effects the company already enjoys, according to GeyerGorey’s Stucke. Network effects occur when a service increases in value the more people use it.

“The problem is this is a rather dynamic industry, and who knows to what extent that WhatsApp may become passe two or three years down the road,” Stucke said. “To what extent do consumers then migrate to some other product?”

To contact the reporters on this story: David McLaughlin in Washington at dmclaughlin9@bloomberg.net; Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: Sara Forden at sforden@bloomberg.net

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