Anti-Monopoly Actions Against Facebook and Legal Risks Incurred by Tencent Blocking its Rivals

The US Federal Trade Commission and others in 48 states and areas in the US filed anti-monopoly actions against Facebook for its acts of blocking access of its rivals’ apps to the application programming interface of its open platform. Actually, such acts are very common and even more serious in China. For example, WeChat developed by Tencent blocked APIs of open platforms of apps and domain names of many of its rivals.

Acts of platform companies blocking others do much damage to orderly competition and could harm or even destroy medium and small size startups. Let’s see what we can learn from the Facebook anti-monopoly action case to prevent monopolies among Chinese platforms.

1.What did Facebook do?

Facebook launched an open platform for third party developers, where they can login in, search friends and give likes on their own Facebook pages after getting access to the open platform. Access to the open platform enables other developers to take advantage of Facebook platform to achieve very fast growth and is applauded for creating a win-win situation.

Facebook gives restricted access and blocks apps developed by its rivals for its own benefit as a platform. The Platform Agreement 2013 clearly states that our existing policy opposes to and we now affirm our opposition to a small number of apps copying our functions or apps increasing the number of such apps’ users in a way that is almost valueless for Facebook users, for example, by not allowing users to get back to and share Facebook easily”.

The anti-monopoly complaint filed by the US Federal Trade Commission this time noted three cases involving blocked apps, including Vine, a short video app of Twitter, Circle, a position-based app for sharing photos and Path, the initial social network app created by former employees of Facebook. All the apps suffered a major setback with the former two being closed two and the number of users of Path decreasing sharply. According to emails sent within Facebook found out by the Federal Trade Commission, Facebook blocked the apps mainly because it felt a threat to compete.

The complaint stated that Facebook imposed anti-competition obligations on third party software developers on the open platform for years. Facebook gives key access to the open platform on the condition that apps having such access don’t develop functions that compete with each other, nor do they connect themselves to or promote other social network services.

2.Why Facebook was alleged to violate anti-monopoly law?

The complaint showed that the Federal Trade Commission considered acts of Facebook refusing to give access to the open platform to third party developers unless they do not compete as a violation of anti-monopoly law. Someone believes that Facebook is right because there is no reason for letting its rivals use its own platform.

This is an academic question about anti-monopoly. It’s all right and completely legal for general platforms not to allow their rivals to get access to and use their platforms. Legal requirements for platforms that dominate the market are different. Anti-monopoly laws of different countries do not allow operators to abuse their domination of the market to eliminate or restrict competition or refuse to transact with others without good reasons.

Blocking a person’s access to a platform means refusing to close a transaction with them. Facebook cannot use its domination of the market to restrict development of medium and small size businesses. If Facebook blocked access to its open platform only for avoidance of competition, this would not be a good reason. Good reasons are limited to things prohibited by law, for example, blocking sex websites, malicious software, etc.

3.What did Tencent do?

Like Facebook, WeChat and QQ of Tencent have their own open platform access services. What Tencent did more than Facebook was blocking rivals’ website links in its social software besides open platform access. I remember a recent aggressive blocking campaign by Tencent in 2019 when three of its rivals launched their social service products almost at the same time, including byte-dance’s Duoshan, Bullet Message of Luo Yonghao’s company and MT of a company of Wang Xinxin, founder of Qvod.

The three rivals had no opportunity to battle together against Tencent as people thought because Tencent cut off their share or jump links on WeChat, let alone open platform access. The three new products soon disappeared as they were completely unable to do promotional activities via WeChat.

Tencent couldn’t have treated Ali and Byte Dance better than startups. Ali’s Taobao, Tmall, Alipay and Ali Laiwang and Byte Dance’s Douyin, Watermelon Video, Volcano Video, Feishu and other apps were blocked. To a large extent, Tencent has blocked open platform access and promotional links as a way of anti-competition to maintain its competitive advantages.

I found Tencent included anti-competition provisions in its software agreement like Facebook did. The Tencent WeChat Software License and Service Agreement provided that Tencent was entitled to decide who can receive its services, how functions work and persons to whom and the extent to which functions are open, data interface is provided and data are disclosed. If a third-party developer has an app which is similar to WeChat or its service platform in main function or function unit or can realize main uses of such function or unit, Tencent has the right to suspend or terminate the services as the case may be.

The WeChat Regulations of Contents from External Links provides that Tencent is entitled to take action against contents of function services similar to ones of WeChat or its service platform, contents similar to existing main functions or function units of WeChat or its service platform or contents that can realize main uses of such functions or function units, including not limited to stopping link contents from spreading on WeChat, refusing access to related domain name or IP address, making related link unable to open, making related contents unable to be seen in the circle of friends, etc.

It is absolutely rightful of Tencent to block its rivals on WeChat. As an platform operator, it is in charge of the platform and certainly decide its operation rules. Furthermore, as technology advances very fast, after your rival has grown to some extent, you could probably not prevent it from further growing. The best competitive strategy is to nip your rivals in the bud or get them out of your realm.

4.Why Tencent dared to take the risk of violating the Anti-Monopoly Law?

Tencent has done in-depth studies of risks brought by the Anti-Monopoly Law. Tencent’s response showed a complete knowledge of weaknesses in administration of the Anti-Monopoly Law, which is in effect for over ten years. My opinions on administration of the law in the internet industry are backward theories, weak administration of law, conservative administration of justice and treatment of internet competition with too much leniency.

Traditional theories about anti-monopoly law are not fully adaptable to the internet, which appeared lately. To identify the market on which a company has a monopoly, boundaries of the market should clear. In traditional theories the tool used to define boundaries of a market is called “assumed monopolist test”, in which the price of the target product is usually supposed to increase to see if potential purchasers would change to buy other products that are good alternatives of the target product. If the assumed monopolist still has a profit despite a fall in sales caused by an increase in the target product price, the target products form a related product market.

Internet-based platforms are bilateral and provide free basic services and paid value-added services. For example, WeChat users can receive free real-time communication services and payments from advertisers for clicking their ads in the circle of friends. If WeChat users are required to pay for real-time communication, all of them would give it up and seek free services from others. The purpose of the test cannot be met.

The government in charge of administration of anti-monopoly law is lenient with internet companies over years. In the operator centralization area Baidu, Alibaba and Tencent finished a lot of mergers including ones with DiDi, Kuaidi and Uber China, basically without filing a report on centralizing operators. Most of cases where law enforcement authorities gave punishment for abuse of dominance of the market are connected with public utility businesses or administrative monopoly. Cases of abuse of dominance of the market in the internet industry, even ones that attract a lot of public interest are barely regulated by authorities in charge of administration of the Anti-Monopoly Law. JD had accused Alibaba of forcing its platform users to choose from the two alternatives for years before the Administration for Market Regulation filed and started to investigate the case.

Judicial authorities are even more conservative in trials. During the 3Q battle Tencent announced that QQ software would not run on computers with 360 software and users could not login in QQ until they uninstall 360 software. Numerous users were forced to choose one of the “two alternatives”. The Ministry of Information had to interfere and require the two sides stop fighting. Nevertheless, the court decided Tencent had no dominance of the market, let alone abuse of dominance of the market.

For the administration of law and justice under the Anti-Monopoly Law, Competition rules on the Chinese internet market used to be like the law of the jungle. This is related to the stage at which national economy developed at that time. To encourage growth, the policy of non-interference in competition was appropriate, which I believe the former government had assessed. Positively, the policy contributed to amazingly rapid growth of Chinese internet companies that continued for over ten years, a lot of which expanded abroad and gained international competitive advantages.

Tencent could ignore the Anti-Monopoly Law and block its rivals on social apps recklessly these years because of its advantages in time and place.

5.What causes the situation to change?

Now the situation is different from what is discussed above. Demographic dividend is gradually disappearing. The growth speed of the internet industry is much lower than before. According to statistics published by Xinhua News in September 2020, the number of internet users in China reached 940,000,000 equals to two thirds of the national population. Back in 2017 the growth rate of internet users was only 6%, while before that the annual rate was above 10% every year. As online population increases at a lower speed, the internet industry grows less rapidly and more steadily.

Monopolies internet giants have increases polarization between the rich and poor in the world with its negative impact on the traditional economy being more obvious, about which increasingly more people are unsatisfied. Meanwhile, governments are alert to internet companies’ abuse of dominance of the market and mergers that violate the Anti-Monopoly Law. Anti-monopoly investigations or actions against internet giants tend to increase all over the world. Even in the US where internet companies are treated most leniently anti-monopoly campaigns began. The US Department of Justice has filed an anti-monopoly action against Google and the Federal Trade Commission and others in 48 states and areas have filed two anti-monopoly actions against Facebook since the EU investigated and fined the US internet giant last year.

Protecting fair competition and consumers’ legal rights and implementing the Anti-Monopoly Law, especially in the internet industry are in the Chinese mainstream. Two landmark events are as follows.

a.The organizational reform in 2018 transferred administrative powers to enforce the Anti-Monopoly Law of the National Development and Reform Commission, the Ministry of Commerce and the State Administration for Market Regulation to the State Administration for Market Regulation.

b.The State Administration for Market Regulation promulgated the Anti-Monopoly Guide in Financial Areas of the Platform Industry (for the public to give opinions on) (“Guide”) at the end of 2020.

The publication of the Guide only for the public to give their opinions on resulted in fairly large decreases in share prices of internet companies. The government’s attitude towards the policy of non-interference in competition between internet companies changed because of anticipation on the market. The Guide clarifies controversial issues relating to anti-monopoly in the internet industry, including anti-monopoly reports on centralizing operators in standard transactions involving VIE, extra allowances, brand blocking, “two alternatives”, “use of big data to the disadvantage of existing customers”, downgrading in search results, data use restrictions, technical barriers and other possible forms of abuse of dominance of the market and anti-monopoly cases in financial areas of the platform industry which could be dealt with without considering related markets.

I strongly advocate the Guide and want its official version to be published and implemented because as the second half of the internet competition which should be fair, legal and orderly began, wild growth of the internet industry would end. However, fair competition is impossible as long as Leviathan remains there. Tencent has blocked its rivals on WeChat as before since the Guide was published months ago. The abuse of dominance of the market does serious damage to orderly free competition.

As mentioned above, Duoshan, MT and Bullet Message were good special products at the beginning of development when being blocked by Tencent. Their developers were successful and experienced entrepreneurs. If they were not blocked by Tencent at the very beginning of their development, they would be popular for excellent user experience. Unfortunately, they died from being blocked by Tencent. That was a blatant killing of technology innovation and will adversely affect the technology industry and national economy and employment.

Tencent won an anti-monopoly case filed by 360 against Tencent years ago. With the judgement Tencent made reckless attacks on its rivals by taking advantage of its dominance of the market. Facebook was sued for similar blocking actions in the US. It may be necessary to take a new anti-monopoly action or investigation in China against Tencent’s abuse of its dominance of the market.

 

Lawyer Contacts

You Yunting

86-21-52134918  

youyunting@debund.com

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