Would Breaking Up Big Tech Help or Harm Consumers?

Recent reporting by Politico suggests the Federal Trade Commission (FTC) “is likely to sue Facebook for antitrust violations.” While the exact nature of the allegations against Facebook is unknown, it is widely believed the FTC will claim Facebook “unfairly stifled competition as it snapped up smaller rivals and maintained a stranglehold on its user’s data.” It’s also not known what legal remedy the FTC will seek, although it is possible they will demand the company be broken up as per the demands of Senator Elizabeth Warren. Seeking the breakup of Facebook is not beyond the realm of possibility as the Department of Justice (DOJ) asked the U.S. District of Court for D.C. for “structural relief.”

The federal suit against Facebook will likely follow a bipartisan state-level suit led by New York Attorney General Letitia James. While Facebook ought to answer for any alleged violations of antitrust statute, any legal remedy should ensure that consumer welfare is not harmed.  

The likely federal antitrust suit against Facebook will no doubt be part of politicians targeting of big tech companies, similar to other cases in the last few months against Google and Visa, as well as the House Judiciary Committee calling for structural separations of big tech companies such as Facebook, Microsoft, Apple, and Google.

One of the most significant ways an antitrust suit against Facebook could harm consumers is by reducing the value derived from network effects. In the simplest sense, network effects are the benefits gained from the number of current and future users. If Facebook was broken up from one large company into several smaller ones, it’s highly likely the 223 million users Facebook currently has in the United States would be reduced meaning the value consumers derive from using the service correspondingly falls. For consumers, this could be particularly harmful as many use the platform to not only connect with friends and family but also to network and find employment and connect with small businesses.

The effects of a successful antitrust suit could be particularly damaging to small businesses that depend on the platform to advertise and sell their products. Facebook estimates that globally, over 90 million small businesses use the platform to reach consumers as an eCommerce service. Were the number of users to fall, businesses would undoubtedly be affected as the platform provides access to fewer consumers.

Fewer users on the platform could also fundamentally disrupt Facebook’s business model that provides a free service for consumers but is funded through advertising revenues. In 2019, for example, Facebook generated $69.7 billion from advertising revenue, approximately 98% of its total revenue. Facebook is only able to generate this massive revenue because of the significant number of users Facebook has, both in the U.S. and across the globe. If the FTC successfully broke Facebook up there would undoubtedly be fewer users on the platform, forcing the company to recoup revenue. This could see the platform imposing a fee for a service consumers currently receive for free. If Facebook is to be broken up as a result of a successful FTC suit, lower-income Americans would undoubtedly be the ones priced out of the service.

Additionally, Facebook has made significant investments in data protection that would be lost if the FTC successfully broke the company up. In 2019, for example, Facebook CEO Mark Zuckerberg pledged to spend $3.7 billion to keep consumer data secure. This increase in investment was in addition to hiring “an estimated 10,000 new employees who will focus on combating data breaches.”  Were Facebook to be broken up, it’s highly probable that these investments, that have produced one of the most sophisticated cybersecurity and data protection regimes, would be lost, leaving consumer data significantly more vulnerable.

Breaking up big tech could lead to reducing consumer welfare. While the exact legal remedies sought by the FTC are unknown at this time, those seeking to prosecute Facebook, for example, should be aware of the damage demanding its breakup could cause to consumers and small businesses who depend on access to the platform.

When it comes to tech, big is not necessarily bad.

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