The Byju’s- Aakash Deal: A missed opportunity for the CCI
Tapamoy Ghose and Khushi Dua[i]
The sudden entry of COVID-19, a black-swan event, has shaken up all sectors of the economy. However, these changed circumstances, including the unprecedented lockdown, have brought an impressive boom in the ed-tech industry. The surge in demand for remote learning has created an acquisition spree among ed-tech start-ups to fill portfolios or to gain economies of scale. Recent trends indicate that ed-tech deals are proliferating worldwide, and dealmakers are expecting spectacular growth in 2021 as well. This is evident by the fact that in 2020, India attracted an investment of $2.2 billion in the ed-tech sector. In comparison, it is pertinent to note that India could get only a $ 1.7 billion investment in the last decade before the onset of the pandemic.
In this article, the authors will analyse one of the largest ed-tech deals of Byju’s acquiring the brick and mortar coaching centre, Aakash Educational Services. Concurrently, light will be thrown upon other deals signed by Byju’s to gain strategic control in the market, posing a significant threat to its competitors.
The Byju’s merger policy- A killer acquisition
The acquisition of various enterprises by the Ed-tech giant Byju’s over the past year has raised serious concerns including that of a strong possibility of abuse of dominance by Byju’s. To analyse the same, let us first look at the significant merger deals made by Byju’s:
Byju’s raised $1.25 billion in 2020 and has been continuously looking for more funding in the market with the hope to acquire more enterprises in the education space. At the beginning of March 2021, Byju's, in its ongoing round of Series F funding, raised around $460 million to acquire Aakash, thereby successfully making the value of its own company (Byju’s) at over $13 billion. Byju’s policy of merger or acquisition to gain a strong foothold in the education space raises a series of questions regarding the likelihood of causing an effect on competitors in the future, which ideally should invite the attention of the competition regulators.
Ed-tech market and dominance: An ominous possibility
Section 4 of the Competition Act, 2002 (hereinafter, “Act”) prohibits enterprises from using the position of market control to drive out equally competing businesses from the market. The dominance of an enterprise (here Byju’s) is determinable only within the confines of the relevant market. Thus, ascertainment of the market is a crucial factor under the Act. To find a relevant market, the question that the Competition Commission of India (CCI) may grapple with would be whether the ed-tech market and conventional education market are different or the same?
In a catena of orders such as the Snapdeal and Flipkart cases, the CCI has held that online and offline markets are merely different distribution channels and are not separate markets. However, with the advent of e-commerce platforms, the CCI deviated from its earlier position and held the online and the offline markets to be distinct and separate in FastTrack Call Cab Private Limited v. ANI Technologies Private Limited. Therefore, the delineation of the relevant market in the present context would be the ed-tech market and the conventional education (brick and mortar) market for competitive exams.
Based on the relevant market, the enterprise's position may be assessed to identify the position of dominance it may occupy in the said relevant market. At present, Byju’s has a user base of 57 million and a subscription base of 2.4 million, which is the highest among all the competitors. In the same ed-tech market, its nearest competitor “Unacademy” has a user base of 30 million and a subscription base of 350,000. Since user or subscription base is an indicator of the market share at e-commerce platforms, Byju’s is a dominant player in the relevant market, way ahead of its closest competitor Unacademy based upon statistical data.
Leveraging into another market: A golden opportunity or an abuse?
Under Section 4(2)(e) of the Act, leveraging of market share refers to a situation wherein an enterprise uses its market power in one market to capture profits or gain incentives by tipping another market in its favor. The effect of such leveraging could be more pronounced when there are direct or indirect network effects in the market.[i]Since the presence of a two-sided platform is necessary to create a network effect, it is not necessary that both the platforms must operate on the same mode of operation. Instead, they can operate on two different channels, namely online and offline. Thus, the network effect arises when the value of a product increases with an increase in the subscription or user base of another product which helps the firm leverage its position in one market to enter and operate in another market.
In this regard, the pertinent question is whether network effects can be considered a factor by the regulators to establish dominance or its abuse? The CCI always remained apprehensive while considering ‘network effects’ as a factor under Section 19(2) of the Act. However, with the advent of technological platforms, the network effects work in their favour, leading to substantial consumer footfalls in such platforms. Therefore, the network effects form enormous market power that can affect the competition in their favour, as seen from the observation of the CCI in the recent interim order of FHRAI v. Make my Trip.
A similar approach should be taken in the present case where Byju's saw its heavy user base in the ed-tech market as an opportunity to enter into the conventional education market through the Aakash acquisition. Aakash owns and operates more than 200 tutoring centers across the country, with approximately 250,000 students. After the merger, more customers will use Byju's services along with Aakash services or vice versa, thereby increasing the value of the product. Here, the economic theory of "network effects" will come into effect and lead to explosive growth, which creates a possibility of Byju’s and Aakash dominating both online and offline markets in the future. The billion-dollar figure deal raised quite a few eyebrows as it would enable Byju’s to directly compete with the conventional exam preparation competitors such as ALLEN, Vidyamandir, FITJEE, etc. Now, with the capital Byju’s has, they possess the tools to tip the market further in its favour by acquiring more enterprises. This may indicate the possibility of controlling the entire education market by Byju’s on its whims and fancies, to the detriment of other competitors in the near future.
Though the CCI recently approved the Byju’s- Aakash deal as they felt that the said transaction would not raise any competition concerns or cause any appreciable adverse effect on competition (AAEC). However, they failed to consider the possibility of abuse of dominance through network effect which is one of the most emerging and imperative factors of dominance in online platforms. Therefore, the authors believe that the present deal is a missed opportunity for the CCI to formally recognize ‘network effect’ as a factor of dominance in digital space.
The way forward: A balanced approach
Considering the current COVID situation, there can be no doubt that the ed-tech market currently requires more investment and innovation. The CCI cannot be asked to regulate the market in such a manner that would deter the enterprises from investing, thereby hampering such a market's growth. Regulatory errors which would remove the incentives for the market players to innovate and improve the product quality and the market, must be avoided at all costs by the regulators. However, considering the market power that the enterprises hold, the CCI should interfere and regulate mergers in a manner that negates the scope of any anti-competitive conduct by the market players.
As of now, only the asset value threshold determines the notification of merger deals to the CCI under Section 5 of the Act. However, the authors recommend that the suggestion of the Competition Law Review Committee in 2019 to include the ‘size of transaction’ and ‘transactional value threshold’ should be considered in order to bring the merger deals in a digital space within the purview of the CCI under Section 5 of the Act. If the CCI is hesitant to introduce a 'transactional value approach' on the grounds that it would lead to a chilling effect on investment, they should consider the position of regulators in other jurisdictions. In jurisdictions such as the US, UK, and EU, the antitrust authorities are empowered to investigate deals that do not satisfy the threshold if it poses a threat to competition. On the other hand, Canada, Russia, and South Africa follows hybrid approach where both turnover and transactional values are taken into account for scrutiny. After looking into the merger mechanisms in other jurisdictions, the authors suggest following any of the approaches mentioned above to ensure that the anti-competitive deals in the digital economy, such as the ed-tech sector, should not escape inspection. Lastly, the CCI should strive to find a balance by preventing possibilities and practices that may have a negative effect on the competition while simultaneously protecting the interest of the consumers by allowing for innovation and technological improvements.
[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 Second-Year law student at NUALS, Kochi. His interests lie in Competition Law, Securities Law and Insolvency & Bankruptcy Law. Khushi Dua is a Second-Year law student at NUALS, Kochi. Her interests lie in Competition law, Insolvency and Bankruptcy Law and General Corporate Law.