Why the FTC Has a ‘Tricky’ Antitrust Case Against Facebook

The Federal Trade Commission’s antitrust lawsuit against Facebook is a legitimate threat to the $800 billion social networking giant. Its chances for success, however, are unclear. At first glance, the case appears straightforward: The FTC is claiming Facebook not only has a social network monopoly, but that it has maintained that position primarily through its acquisitions of Instagram and WhatsApp. (The FTC’s case also has the backing of 48 state attorneys general, underscoring bipartisan support for a breakup.) Facebook bought Instagram for $1 billion in 2012, and two years later, paid $19 billion for WhatsApp. Through those acquisitions, the FTC claims Facebook hampered competitors by preventing them from using its APIs, allowing Facebook to build an “unmatched position” in the social media space. That’s where things start to get messy. “The tricky part is, we’re looking at acquisitions that took place 6 and 8 years ago,” Prof. John Lopatka, an antitrust expert at Penn State University, told TheWrap. “If either of these cases had been brought immediately when the mergers were announced, I don’t think anybody would’ve raised an eyebrow.” That the commission approved these deals years earlier is the first major roadblock for the FTC. Facebook has already pointed this out, with the company saying on Wednesday the government now wants a “do-over.” If the FTC’s case is successful, it would send “a chilling warning to American business that no sale is ever final,” Facebook added. That’s a valid argument. When Facebook made those deals, both companies weren’t a viable threat to its dominance; Instagram, famously, only had 13 employees at the time it was acquired. Facebook will likely argue those deals only look great now, years later, after those companies benefited from the structure and guidance Facebook gave them — but that it was no guarantee they would become the giants they are now. That line of thinking makes sense to some antitrust experts. Gregory Rosston, director of the Public Policy Program at Stanford University, previously told TheWrap that undoing the Instagram and WhatsApp deals might not be a great idea. “You want to be extremely careful to do something like that because we don’t want to penalize success,” Rosston said. “When Facebook bought Instagram, Instagram was one of several different photo-sharing sites. Is it that everybody knew Instagram was going to be the one that would be really successful as a potential competitor to Facebook? I doubt that, or the acquisition would not have been approved.” Lopatka agreed, saying the issue for the FTC is that at the time the deals were made, neither Instagram nor WhatsApp, although gaining popularity, controlled a large share of the social media market. Here’s where the case will likely hinge: The FTC, according to Lopatka, will argue “the illegality is in monopoly maintenance, rather than monopoly acquisition.” In other words, it’s not about whether the deals should’ve been allowed, but whether they later helped Facebook keep a stranglehold on the social media market. That’s because while having a monopoly isn’t illegal, weeding out competition, even through expensive buyout deals to maintain that monopoly, is illegal. It might seem like a small distinction, but it’s a critical one in this case. On that point, the FTC is going to have a “reasonably good case” the mergers “did perpetuate Facebook’s monopoly,” Lopatka said. Compounding matters for Facebook, the FTC’s case includes several emails from CEO Mark Zuckerberg indicating buyouts could be used to block competitors from gaining traction. “It is better to buy than compete,” Zuckerberg explained in one 2008 email. Still, this doesn’t make it a slam dunk case for the FTC. For one thing, the commission will need to define the social media market, Lopatka said, and show Facebook indeed has a monopoly. This ends up being another “tricky” factor in the case. In the lawsuit, the FTC says Facebook controls over 60% of the relevant market: The magic number judges look for in these cases tends to be 70% of a market or more, Lopatka said. And how the FTC defines the market will be another sticking point. In its lawsuit, the FTC says the “personal social networking” market is “distinct from, and not reasonably interchangeable with, online video or audio consumption-focused services such as YouTube, Spotify, Netflix, and Hulu.” It’s an interesting way to frame the market, considering it leaves out notable social platforms like Twitter, which has 330 million monthly users, and Snapchat, which has 249 million users. It also doesn’t include TikTok, which now boasts 100 million monthly users in the U.S. alone. (Facebook, for comparison, has 255 million monthly users in the States and Canada, and 2.7 billion overall.) Facebook COO Sheryl Sandberg is already drawing attention to this point. In an interview with Tamron Hall set to air Friday, Sandberg argued Facebook isn’t a monopoly and has plenty of competition. “I think it’s really hard to make the argument we don’t compete and compete hard for your time and attention,” Sandberg said. “I can’t get my own kids to post on Instagram because they’re so busy on Snapchat and TikTok. You know, if you want to get electricity today for your home, you’ve got one choice. But you’ve got lots of choice for your time and attention.” How this nebulous social media market is defined will be a key moment in the FTC-Facebook battle. Without a defined market — and a clear demonstration Facebook has a monopoly — the FTC’s lawsuit will falter. “The lines the FTC draws do seem somewhat artificial, and they will certainly be contested in litigation,” Lopatka said. For the sake of argument, let’s say the FTC makes a convincing argument Facebook has a monopoly. At that point, another problem comes up, Lopatka said: What would your remedy be? This gets complicated, too. Simply breaking off Instagram and/or WhatsApp from Facebook may be almost too difficult at this point to pull off, considering they’ve been woven into Facebook’s fabric over the last few years. And even if they are spun off as their own entities, how does it benefit consumers? Showing Facebook, as a free app, has harmed consumers with its acquisitions will be a difficult argument to make. Ultimately, this case will depend on the FTC’s ability to show Facebook’s deals helped it build and, more importantly, maintain a monopoly by stifling competition. To do that, defining the market and showing Facebook does, in fact, have a social media monopoly will be critical. How that shakes out remains to be seen, but the fight should be a spectacle: Facebook, with an army of lawyers, ready to push back against the federal government, 48 attorneys general, and all the resources the government has at its disposal. “Monopolization cases are generally difficult to prevail, but not impossible to get changes,” Rosston said, pointing to the Microsoft and AT&T cases of the past. “However, with the changes in the judiciary over the past several years, succeeding in court may be even more difficult.”