Facebook’s antitrust lawsuits, explained

There is growing support for antitrust action against big tech, with scrutiny set to continue even after the end of President Donald Trump’s administration.

In two recent lawsuits filed by the Federal Trade Commission (FTC) and more than 40 state attorneys general, social media giant Facebook, Inc. is facing the unthinkable – its break up.

After a nearly two-year-long investigation, the FTC, alongside a separate suit from some 40-plus attorneys general from across the United States, has charged Mark Zuckerberg’s Facebook with illegally using its “dominance and monopoly power to crush smaller rivals and snuff out competition.”

The move represents the latest and perhaps the most heavy-handed critique of American “big tech” in recent months. Google LLC is already facing a lawsuit from the US government focused on its alleged search engine monopoly, while the US Congress has charged big tech with creating monopolies more broadly.

The recommendation to break up Facebook would be disastrous for the social media giant’s business and, rather than just imposing a simple fine, would serve to unwind the multibillion dollar acquisitions of rivals Instagram and WhatsApp.

However, there is no guarantee that the suits will succeed. Antitrust actions against big tech face a number of hurdles, including, but not limited to, outdated laws, well-resourced defenses, and more.

But one thing is for certain – there is growing support for antitrust action against big tech, with scrutiny set to continue even after the end of President Donald Trump’s administration.

The two lawsuits have already received bipartisan support, with Democrats and Republicans largely in agreement that big tech has broken the law, disagreeing only on potential remedies to this problem.

Facebook under fire

The lawsuits from the FTC and more than 40 US state attorneys general are the culmination of a nearly two-year-long investigation into Facebook’s past business acquisitions.

46 states joined the lawsuit, with only South Dakota, South Carolina, Alabama and Georgia abstaining.

Though the two suits are separate, their findings came to similar conclusions.

In particular, the two lawsuits charge that Facebook’s 2012 US$1 billion purchase of Instagram and its US$19 billion purchase of WhatsApp two years later removed potential rivals from the market, serving to solidify Facebook’s dominance in the social media market.

New York state Attorney General Letitia James, leading the states’ investigation into Facebook, argued that “for nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition, all at the expense of everyday users.”

In its lawsuit, the FTC, the US government body that enforces antitrust law, argued that Facebook, in its acquisition of Instagram and WhatsApp, had used its monopoly power “with the aim of suppressing, neutralizing and deterring serious competitive threats.”

Instagram and WhatsApp have grown in popularity since Facebook’s acquisition and become more closely integrated into Facebook’s overall platform. This arguably makes it harder for users use social media and while avoiding Facebook.

As a result, the FTC has called for the acquisitions of Instagram and WhatsApp to be unwound and made independent once again. Future acquisitions by Facebook would be placed under significantly more scrutiny.

This recommendation is essentially the harshest that can be made and represents a big move by government lawyers and regulators, which, even if they ultimately fail, nonetheless shows that “the United States has entered a much bolder new era of antitrust enforcement,” according to The Verge’s Casey Newton.

That there is a bipartisan consensus on this issue also suggests a future of more stringent antitrust oversight. Republican Representative Ken Buck responded to the lawsuit by stating that “big tech’s reckoning has just begun,” while Democratic Representative David Cicilline concurred with the lawsuits’ findings, writing that Facebook “must be broken up.”

Facebook immediately hit back against the lawsuits, with the company’s vice president and general counsel, Jennifer Newstead, arguing in a blog post titled “Lawsuits Filed by the FTC and the State Attorneys General Are Revisionist History” that Facebook’s acquisitions provided better products for consumers and the FTC cannot retroactively disapprove of transactions it had already signed off on years previously.

In challenging Facebook’s acquisitions of potential competitors, “this lawsuit risks sowing doubt and uncertainty about the US government’s own merger review process and whether acquiring businesses can actually rely on the outcomes of the legal process,” Newstead wrote.

Implications

Facebook’s shares fell 2% after the announcement of the lawsuit, but a break up of its acquisitions would have a much more seismic impact on the social media giant’s business.

For one, much of Facebook’s future growth is tied to Instagram and WhatsApp.

For Facebook, Instagram represents an area of as-yet incomplete revenue growth. In 2019, Instagram delivered some US$20 billion in revenue for Facebook, which was about 29% of all of Facebook’s ad sales that year.

According to the research firm eMarketer, Instagram’s 2020 revenues are expected to reach some US$28.1 billion, about 37% of Facebook’s total ad revenue, as well as an annual sales gain of US$8.1 billion that would account for a huge share of Facebook’s overall revenue growth.

Though it makes essentially no money for Facebook, WhatsApp is also central to Facebook’s plans of future revenue growth. Facebook plans to put WhatsApp front-and-center for its emerging e-commerce presence, connecting WhatsApp’s messaging features to businesses.

Both apps also solidify Facebook’s global presence and, in some markets, are actually more popular than Facebook’s main platform. In India, WhatsApp has some 100 million more users than Facebook while in Japan Instagram has some 70% more users than Facebook.

Losing these apps in a potential breakup would mean more difficult competition for Facebook in emerging markets around the world, impacting future revenue growth significantly.

Before that eventuality can be realized, however, the lawsuits must overcome some significant obstacles.

Prosecutors have to show that Facebook’s purchases of Instagram and WhatsApp were targeted to kill off competition and potential rivals.

Then, owing to the text of America’s antitrust laws and the consumer welfare standard, prosecutors must also show that consumers and the social media market would have been better off without the acquisitions.

Central to this series of lawsuits, prosecutors will have to show why the mergers and acquisitions were approved years ago and are only being challenged now.

In its defense, Facebook will likely point to the growth of Instagram and WhatsApp achieved under Facebook’s ownership. It will also likely argue that under Facebook’s ownership, neither app has to worry about profitability and can instead focus solely on the consumer experience.

Facebook will also point to the fact that the FTC signed off on the acquisitions at the time and that the company has already stated that “the government now wants a do-over with no regard for the impact that precedent would have on the broader business community.”

But there are arguments in the prosecutors’ favor. Instagram founders Kevin Systrom and Mike Krieger resigned from the company following Facebook’s acquisition, allegedly as a result of the increasingly tight integration that was sought by the parent company, to the detriment of Instagram’s independence.

And as the FTC lawsuit argues, Facebook’s acquisition of Instagram deprived consumers of, among other things, “the presence of an additional locus of competitive decision-making and innovation” and “an alternative provider of personal social networking for users untethered from Facebook’s control.”

In the WhatsApp acquisition, consumers also lost “a competing personal social networking provider,” with WhatsApp limited to “providing mobile messaging services” by Facebook, according to the FTC.

It will likely be years before any resolution to the lawsuits is met. Nonetheless, as Diana Moss, president of the American Antitrust Institute, argues, winning the case against Facebook is “going to be a challenge because the standards of proof are formidable.”

But for now, win or lose, the two lawsuits represent another round of pressure heaped on American big tech and a sign that greater antitrust scrutiny is here to stay.

Have a tip or story? Get in touch with our reporters at tips@themilsource.com