Facebook's Battle in Germany Is a Thorn in WhatsApp Integration

(Bloomberg) -- Facebook Inc. is fast becoming a European regulatory punching bag, just as it’s trying to boost the value of its lucrative targeted advertising by combining user data with its Instagram and WhatsApp services.

Germany’s antitrust authority on Thursday ordered the social network to stop its current tracking of German users online outside its own site unless it seeks consent for gathering and using data. The Federal Cartel Office said Facebook will need each user to sign off on linking their Facebook accounts with Instagram and WhatsApp data or keep the data separate.

"This is the first time a regulator has imposed a restriction on the possible integration of WhatsApp and Instagram into Facebook," said Aitor Ortiz, an analyst at Bloomberg Intelligence. "This may be replicated across Europe by other regulators."

Facebook’s legal battles in Europe have shifted into high gear over the past year, driven by concerns over fake news, illegal content and data breaches. On top of fierce scrutiny from privacy watchdogs, it’s now facing attention from antitrust regulators, who can levy bigger fines and order business changes.

Germany’s justice minister said Facebook’s move is "an attempt to create a monopoly" that poses antitrust and privacy questions. Ireland’s data privacy regulator, which takes charge of European privacy probes involving Facebook, asked for an "urgent briefing" last month and said it will be "very closely scrutinizing Facebook’s plans as they develop."

Linking user data from Facebook with their web-surfing matters because it helps Facebook see what people are interested in and what they buy, information that makes its ads particularly valuable. It made $13 billion in ad revenue in Europe last year. When it started operating in Europe more than a decade ago, data-protection regulators were toothless. That’s changed as publishers started complaining about losing ad revenue to internet firms and privacy became a hot-button issue.

Facebook’s popularity -- once lauded for the power of keeping users on its network -- has now become part of its problem. While Russians predominantly use VK and Chinese log on to WeChat for their social network needs, there are few viable alternatives to Facebook in Europe, where it has 282 million daily active users. Its photo-based network Instagram and free messaging service WhatsApp are wildly popular in the region, and last month the company announced plans to merge its various messaging platforms.

Concerns about internet giants have allowed European privacy watchdogs arm up. Under new EU privacy rules in force since May 2018, authorities across the 28-nation bloc were given equal powers for the first time to fine companies as much as 4 percent of annual global sales for the most serious violations.

In Ireland, where Facebook has its European base, the data protection commission has already opened seven probes into the company under the EU’s General Data Protection Regulation, or GDPR, that could result in hefty fines. Google Inc. was fined a record 50 million euros ($57 million) by the French privacy authority in January. It won’t be the last such fine, Ireland’s privacy regulator Helen Dixon said in an interview earlier this month.

European regulators have long been concerned about Facebook’s plans to deepen the integrating of WhatsApp. having previously fined Facebook 110 million euros for failing to tell them about the ability to combine the data when they examined the deal.

The German case opens up a new Pandora’s box of regulatory issues. Is Facebook a monopoly and who are its rivals? When users agree to internet terms and conditions, do they really understand what they are signing? Is ticking a box without reading the terms real meaningful consent? Do they need to agree for Facebook to learn about every website they click on and understand how that knowledge might be used?

The Bundeskartellamt decision "goes to the heart of Facebook’s business model: excessive data accumulation to maximize its advertising revenue," said Agustin Reyna of the European consumer group BEUC. "The decision will reverberate around competition authorities across the EU. Exploitative data practices are a matter of competition law even when a service" isn’t paid for.

But Thibault Schrepel, an assistant law professor at the University of Utrecht in the Netherlands, said the German decision "deviates from the usual standards of competition law" by not explaining why Facebook’s market power lets it collect the data or how that creates "data barriers to entry" that shut out potential rivals, The authority is claiming to protect consumers from the company’s data collection when "in fact, it seems they benefit from this."

While EU’s powerful antitrust arm has no open investigations into Facebook, EU Competition Commissioner Margrethe Vestager said she’d "take an interest" into leaked Facebook emails that included a threat to cut off data access to a potential rival. She joked about internet user terms that no-one reads in a Monday speech where she also described the Cambridge Analytica scandal over data gathered from Facebook as "a huge wake-up call."

©2019 Bloomberg L.P.