Swiggy’s Acquisition of Dineout: A Classic Case of Leveraging Through Network Effect?
Tapamoy Ghose [i]
Swiggy, an online food ordering and delivery platform, has entered into a definitive agreement to acquire restaurant tech and dining out platform Dineout from Times Internet. Swiggy has claimed that the acquisition is designed in a way that will allow it to cater to every food occasion, by maximizing Dineout’s strategic assets in the dine-out space. This acquisition, without a doubt, marks Swiggy's entry into the ever-growing dining out category, as Swiggy itself confirms.
In this article, the author will attempt to point out the competition law concerns which emanate from the said acquisition. It will be argued that the acquisition allows Swiggy to use its dominant position in one relevant market to enter another relevant market, thereby violating Section 4(2)(e) of the Competition Act, 2002 (hereinafter, ‘the Act’).
Abuse of dominance occurs when an enterprise in a dominant position in a relevant market engages in activities with the intent of eliminating other competitors or discouraging future competitors from entering the market. In essence, three elements are required to establish an abuse of dominance: a dominant undertaking, a relevant market, and anti-competitive conduct.
Swiggy: A dominant entity?
Section 4 of the Act prohibits enterprises from abusing their position of strength in the market to dislodge equally competing businesses. It only applies when one enterprise holds a "dominant position”.
The dominance of an enterprise (in this context, Swiggy) is only determinable within the boundaries of the relevant market. In the case of Shri Pravahan Mohanty v. HDFC Bank Limited, the CCI held that when determining a dominant position, the definition of the relevant product market is critical. For that purpose, the relevant markets can be taken to be the ‘market for online food delivery’ and the ‘market for online table booking in restaurants’, based on substitutivity and other factors mentioned under Section 2(t) of the Act.
Pursuant to the European Court of Justice in United Brands v. Commission, an undertaking can be considered dominant for the purposes of Competition Law when its economic position of strength in the relevant market enables the undertaking (Swiggy) to operate independently and freely from its competitors to a significant extent. In this regard, the definition of dominant position under Section 4 of the Act is twofold. The first fold is a reproduction of the United Brands dictum, whereas the second fold views dominance as an ability to affect competitors or consumers in the relevant market in its favour.
By virtue of Section 19(4)(d) of the Act, the economic power of the entity has been taken to be a factor of dominance. In 2018, Swiggy closed a 1 billion USD funding round to add more financial muscle to the company. Later in 2021, another 800 million USD was raised, when the company was valued at a whopping 5 billion USD. Further, when revenue from food delivery is considered, Swiggy earns the bigger chunk of the combined revenue between Swiggy and Zomato (as on December, 2021, Swiggy’s share is 59% of the combined revenue, based on Gross Transaction Value or GTV). Last but not the least, the food delivery revenue of Swiggy saw a jump of 56% from the previous quarter in 2020. Given the extent to which a financial position of strength can affect the market, as held in the BPB Industries PLC case, Swiggy's considerable financial strength is a strong indication of dominance.
Presence of a highly developed network has also been recognized as a factor of dominance in EU. For example, in Hoffmann-La Roche v. Commission, the Court of Justice cited Roche's well-developed sales network as a relevant factor conferring competitive advantages, hence making it dominant. Likewise, Swiggy has more than 195,000 active restaurants on its platform in FY22, which is 110 percent more than it had before Covid-19, according to a recent filing by its investor Prosus Ventures. Following the Hoffman dictum of the European Court of Justice, Swiggy’s well-developed restaurant partner network can indeed be taken to be a critical factor of dominance.
Given all the aforementioned factors, there is no doubt that Swiggy is a dominant player in the relevant market.
Entry into the dine-out space: A classic case of leveraging?
Leveraging, as stated in Section 4(2)(e) of the Act, and elaborated in Mcx Stock Exchange Ltd. & Ors. V. National Stock Exchange of India & Ors., is a situation when a dominant firm uses its power in one market to induce or foreclose sales in a second market. It refers to strategies that a company may employ to extend market power from one market to another. The resulting market power in the second market is due to the leveraging of market power in the first market, rather than the merits of competition.
To appreciate the competition concerns emanating from such leveraging better, a major factor to take note of is the phenomenon called ‘network effect’.[i] Network effect describes any situation in which the value of a product, service, or platform is determined by the number of buyers, sellers, or users who use it. Generally, the more buyers, sellers, or users there are, the greater the network effect—and thus the greater the value created by the offering. In markets with strong network effects, anticompetitive leveraging may allow a firm to "tip" the market in its favour in a difficult-to-reverse manner. In this regard, the CCI has remained sceptical about formally recognizing network effect as a factor considered under Section 19 of the Act. However, the CCI observed in its interim order in FHRAI v. Make my Trip that network effects create enormous market power that can affect competition. CCI observed that, network effects, combined with even minor actions by platforms, may deter and marginalise rivals, further strengthening these effects, which may be difficult to mitigate later.
Online platforms like Swiggy thrives on consumer footfall. Such heavy consumer footfall presented Swiggy with an opportunity to enter the online table booking platform market, through the acquisition of Dineout. As on August 2021, Swiggy had a user base of 20 million active users monthly, which is ever-growing, alongside 195,000 active restaurant partners (in FY 22). This acquisition will allow Swiggy to have ‘table booking for dining-out’ in their product portfolio, as well as to gain access to the consumer base of Dineout and vice-versa. With its heavy user base and technical know-how of the market, Swiggy will be able to offer customised services to consumers on Dineout, thereby subsequently attracting more restaurant partners on Dineout. Eventually, it will allow Swiggy to be dominant in the Dine-out market as well, over players such as EazyDiner, Zomato (it offers table booking service as well, alongside delivery), which is a classic case of leveraging, under Section 4(2)(e) of the Act. Additionally, this acquisition will allow Swiggy to access SteppinOut, (event and experience curator, owned by Dineout), thereby affording it a chance to venture into yet another distinct market. Considering the heavy user base of Swiggy, the possibility of leveraging in ‘event and experience curator’ market in future is real as well. This will potentially enable Swiggy to create an entry barrier in any market they operate, and other competitors would be set to lose out.
Expanding the scope of abusive conduct to include network effect: Justifiable?
According to the Coca-Cola v. Commission, competition authorities are required to undertake a real-time examination of reported abuse of dominance in the relevant market based on the accessible evidence. The General Court in EU, in Lietuvos geležinkeliai AB v Commission, has affirmed the non-exhaustive nature of instances of abuse under any legislation. The Commission and EU Courts have applied Article 102 TFEU to a variety of practises that are not expressly mentioned in the text. AstraZeneca AB v Commission is a prominent example. Following the position in EU, even if the CCI is unable to read abuse through network effect into any of the instances of abuse mentioned under Section 4(2) of the Act, it shouldn’t shy away from classifying abuse through network effect as a new class of anti-competitive abuse.
With the rapid advent of online e-commerce platforms like Swiggy, Amazon etc, the time has come for the CCI to break away from the confines of traditional competition law. The time is ripe to formally recognize network effect as a factor, directly influencing competition. If network effect is not considered, business activities of enterprises such as that of Swiggy acquiring Dineout may look harmless, when in reality, they are not.
If network effect is not formally recognized, the competition enforcement system of India would end up being backdated very soon. The moves made by fast growing entities like Swiggy can have several ramifications for competition law and the time is ripe for the law to stop playing catch up and instead take proactive measures to promote and sustain competition in the markets.
[i] Pietro Crocioni, Leveraging of Market Power in Emerging Markets: A Review of Cases, Literature, and a Suggested Framework, 4(2) Journal of Competition Law & Economics 449-534 (June 2008).
Tapamoy Ghose is a Penultimate year law student at the National University of Advanced Legal Studies, Kochi. He has a keen interest in competition law and policy. For any discussion related to the article, he can be contacted via email at firstname.lastname@example.org.