FTC and 48 States File Antitrust Case Against Facebook
The Trump Administration has focused on competition and the technology sector. First, the Justice Department’s Antitrust Division filed a monopolization case against Google. Last week, the Federal Trade Commission and 46 states filed a monopolization case against Facebook.
These are two major antitrust cases.
When the Biden Administration takes over, it will be interesting to monitor how DOJ and the FTC handle these two cases.
In the most recent action, the Federal Trade Commission, 46 states, the District of Columbia and Guam (collectively referred to as “FTC”) filed an antitrust complaint against Facebook, charging Facebook with illegal maintenance of its personal social network monopoly through years of anticompetitive conduct.
The FTC claimed that Facebook has engaged in a systematic strategy, including its 2012 acquisition of rival Instagram, its 2014 acquisition of WhatsApp, a mobile messaging application, and its anticompetitive conditions imposed on software developers, to preserve its monopoly position. Facebook’s anticompetitive conduct allegedly eliminated potential competition in personal social networking and raised prices for advertisers.
The FTC is seeking an injunction in federal court to: (1) require divestiture of Instagram and WhatsApp; (2) prohibit Facebook from imposing anticompetitive conditions on software developers; and (3) require Facebook to provide prior notice and approval for future mergers and acquisitions.
The Personal Social Networking Market
The FTC noted that personal social networking is a central part of American’s lives, and alleged that Facebook maintains a monopoly in this market. Facebook generated revenue of of $70 billion and profits of more than $18.5 billion.
The FTC explained that Facebook’s monopoly position is protected by high barriers to entry, including significant network effects. A personal social network is more valuable to a user as more users, including families and friends are members. As a result, a new entrant faces significant difficulties in attracting and maintaining a sufficient user base to compete with Facebook.
Acquisition of Instagram and WhatsApp
The bulk of the FTC’s complaint focuses on Facebook’s acquisitions of Instagram and WhatsApp.
As recounted in the FTC’s complaint, Facebook identified Instagram as a real competitive threat to its dominance of the personal social networking market. As consumers migrated from desktop computers to smartphones, and with the then-growing demand for photo-sharing services, Facebook executives, including CEO Mark Zuckerberg, recognized that Instagram as a growing threat to Facebook’s monopoly power.
In response, Facebook attempted to compete with Instagram and launched its own photo-sharing capability. After attempting to match Instagram, Facebook decided to acquire Instagram in 2012 for $1 billion.
The FTC’s complaint outlines evidence, including CEO Zuckerberg’s lengthy emails, identifying Instagram as a direct threat and the need to acquire Instagram to eliminate a competitor. In a 2008 email, Zuckerberg stated that “it is better to buy than compete.”
As Zuckerberg explained to Facebook’s CFO, acquiring Instagram would preserve Facebook’s enduring dominance by controlling an important social networking platform function that could allow Instagram to scale its operations to compete with Facebook:
[O]ne way of looking at [the acquisition of Instagram] is that what we’re really buying is time. Even if some new competitors spring up, buying Instagram, Path, Foursquare, etc now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. Within that time, if we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale.
During this same time period, Facebook perceived that WhatsApp presented a serious threat to Facebook’s monopoly power. Given that WhatsApp was the leading provider of mobile messaging service, Facebook chose to buy WhatsApp rather than compete, and acquired WhatsApp for $19 billion.
Finally, the FTC’s complaint alleged that Facebook had imposed anticompetitive conditions on third-party software developers’ access to its platform, such as the application programming interfaces (“APIs”) that permits developers’ applications to interface and integrate with Facebook. In particular, Facebook only made APIs available on the condition that the third-party developer refrains from developing competing functionalities and from connecting with competitive social networking services.