10 December 2020

The FTC’s case for breaking up Facebook is deeply flawed – let’s hope it fails

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Facebook is being sued by the Federal Trade Commission (FTC) and 48 US states for its acquisitions of WhatsApp and Instagram in 2014 and 2012, respectively (as well as over restrictions about third-party API access to Facebook’s platform, which I will not try to cover here). If these plaintiffs are successful, they could lead to Facebook being forced to sell those services, meaning a break-up of Facebook Inc itself.

The lawsuits allege that Facebook identified Instagram and WhatsApp as nascent competitors to its product and acquired them to avoid having to compete in the marketplace. In this telling, competition would have led to better products for users of these services. 

But the lawsuits are fairly weak, and Facebook probably has a good chance of winning if it does not settle out of court. They suffer from a number of important flaws.

The first is that the lawsuits have a contradictory logic about what market Facebook is supposed to be monopolising, and what companies it is constrained by. The lawsuits’ logic is that Facebook does not just compete with sites with very similar News Feed-type functionality like MySpace or Bebo, it competes with other social media sites too. Instagram is a bit like Facebook, but it’s no more similar than, say, Twitter or TikTok, with which Facebook has other things in common. If Instagram can be considered a competitor to Facebook, so too must Twitter and TikTok — and perhaps Slack, Discord, Twitch, YouTube, Snapchat, Reddit and many of today’s other popular social-networking services as well. 

This is also true for WhatsApp, which faces competition from iMessage (45% of Americans use iPhones) and SMS text-messaging, as well as the messaging options offered by other social media sites.

So the lawsuits face a conundrum: if Facebook’s market is narrow, and it is a monopolist in that market, then it is unproblematic for it to buy services in other markets since they wouldn’t ever compete with it anyway. But if Facebook is in the same market as Instagram, then Facebook is not a monopolist, since lots of other healthy competitors exist in that broad market too. If Instagram and WhatsApp were competitors of Facebook’s when Facebook bought them, they must face lots of competition from other, similar products now. 

Even if the claim is that Instagram and WhatsApp were in separate markets, but the possibility of them entering Facebook’s market constrained it, the same must be true of all the other services adjacent to Facebook today — if WhatsApp could become a Facebook competitor, so could Slack or Discord. What the lawsuits really show is that Facebook faces competition — existing and potential — from all sides, and that entry to these markets is relatively easy.

The second problem with the lawsuits is that they rely heavily on “hot docs”, internal documents that the plaintiffs allege reveal Facebook’s sinister intent. These are a poor substitute for economic analysis. When competition authorities scrutinise mergers, they are often forced to rely on hot docs because they have nothing else to go on and they have to predict the future. In this case, we are looking back at history, and can rely on the empirical evidence that experience provides us.

And it’s the actual effects of the acquisitions we should care about, not what the intended effects were. Imagine we had conclusive evidence that Mark Zuckerberg had angelic intentions in all his business dealings; he wanted nothing more than to make the world a better place. Would this mean that there was no role for competition enforcers to scrutinise Facebook? No, even with the best will in the world, a company can still act anti-competitively. When it does, we should stop that. But the opposite also applies. It doesn’t really matter if Zuckerberg intended to act anti-competitively; it matters if he actually managed to. 

“Hot docs” have another weakness — they can be quoted selectively and easily twisted. One lawsuit quotes the “wrath of Mark”, which Facebook’s competitors who refuse to sell would apparently be subjected to, as something sinister instead of just (pretty absurd) bravado. My own interpretation of the docs is that Zuckerberg was not planning anti-competitive behaviour, but that is not where the focus should be in any case. The third reason to doubt that the lawsuits will succeed is that they propose an implausible counterfactual, at least in the case of Instagram. They assume that, in a world where Facebook had not been allowed to acquire it, Instagram would have been just as successful as it has been in reality.

Almost nobody believed this at the time. Facebook paid just $1 billion for Instagram, and was widely mocked even for that. At the time, Instagram was regarded as a photo-filtering app, and it was not even clear that Facebook would continue it as a standalone product instead of rolling its features into Facebook proper.

Instagram’s valuation looks very low with hindsight — even if we thought that both Instagram and Facebook would be worth a lot less in a world where they were direct competitors (because their profits would be lower, as the plaintiffs argue), Instagram being valued at a tenth of what Twitter was at the time implies that the probability of it reaching that kind of scale was considered to be very low.

The more likely alternative story is that Instagram was not destined for greatness, and that the acquisition itself was what helped it grow. The actual history of Instagram bears this out: decisions like the introduction of Stories (basically ripped off from Snapchat, which had been rapidly gaining ground on it until then) were contingent and made important differences to Instagram’s success.

At the time of the acquisition, Instagram had 24 million users, and made no revenue. It now has over 1 billion users, and is one of the most lucrative services on the internet. It is far-fetched to imagine that Instagram’s success was predestined in 2012, and, if it was, it raises the question of why Instagram allowed itself to be acquired for so little. Facebook did not “shut down” Instagram, it built it into a huge, enormously successful service that complemented its own — far from a “killer acquisition”.

The fourth flaw in the lawsuits is the allegation that user privacy has been damaged by weaker competition in social networking. But more data collection can benefit users, by giving them more relevant and less annoying ads, and by reducing the cost of advertising for businesses. If users don’t mind Facebook collecting data about them—and many appear not to—then, combined with the benefits of data collection, this is an ambiguous “harm” at best. 

The final problem here is that, if the lawsuits are successful, the knock-on effects could hurt the prospects of other would-be Instagrams in the future. Being acquired is a common exit strategy for founders and investors. Making it more difficult to execute that strategy effectively makes it riskier to found a new tech company. It would also deprive users of better products, since acquisitions allow incumbents to improve their products by integrating the service they’ve bought.

So these lawsuits succeeding would be bad news, and a bad application of the law. But if they fail, they may help to clarify antitrust law for tech companies, and help us to drop the idea that every acquisition by a Facebook or a Google is something we need to stop.

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Sam Bowman is Director of Competition Policy at the International Center for Law and Economics.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.