FTC and the States Square Off Against Facebook

Following a year of active antitrust suits that has seen the Department of Justice sue Google and Visa, the Federal Trade Commission (FTC) and 48 states have turned their attention to Facebook, alleging the company “willfully maintained its monopoly power through its course of anticompetitive acquisitions” of WhatsApp and Instagram. Despite the FTC’s present objections, its worth remembering that the organization cleared both the WhatsApp and Instagram acquisitions.

In its current form, the suits levied against Facebook fail to make a clear case that its growth and acquisitions of potential rivals have inflicted harm on consumers. 

The antitrust suit against Facebook ends a year in which there seems to be bipartisan support for reigning in big tech companies with conservatives believing that social media companies have censored their political views and liberals convinced that social media companies have failed to protect consumer privacy, pay sufficient taxes, and exercise too much market power.

What unifies both the federal and state led suits is they have abandoned the well-established consumer welfare standard as a model for antitrust enforcement in favor of an assumption that “big is bad.” Under the consumer welfare standard, “overall consumer welfare and economic efficiency should be the main criterion regulators look at when evaluating a merger or alleged anticompetitive behavior.” Said differently, if consumers do not pay higher prices or are not made worse off by big tech’s market conduct, then there is no antitrust harm to enforce.

On the other hand, the big is bad mentality, first established by Supreme Court Justice Louis Brandies during the 1910s, sees market concentration as inherently bad for both consumers and the market economy and believes antitrust enforcement should be used to address social problems such as “worker’s rights, income inequality better jobs, more economic localism,” and most important, “restraints on corporate political power.”

Brandies’ big is bad model, which federal and state antitrust enforcers now seem to favor, is flawed insofar as it ignores the many benefits that firms with economies of scale, such as Facebook, can provide consumers.

Central to both the FTC and state suit against Facebook was their acquisition of Instagram for $1 billion in 2012 and WhatsApp in 2014. The state lead suit alleges Facebook acquired these companies because they feared they “presented a viable competitive threat, either standing alone or if acquired by a larger firm.” The FTC are more overt in their criticisms of these acquisitions, suggesting they were both initiated with the express “aim of suppressing, neutralizing, and deterring serious competitive threats to Facebook.” Additionally, the FTC alleges Facebook had a “it’s better to buy than compete” mentality.

Facebook’s behavior, according to the FTC, inflicted significant harm to consumers by “limiting and suppressing competition that Facebook would otherwise have to face in the provision of personal social networking.” The suit continues to suggest “users of personal social networking have been deprived of the benefits of additional competition for personal social networking.”

Arguably the biggest weakness in the suits against Facebook is the failure of both the FTC and the states to articulate the harm these acquisitions caused consumers. After its acquisition of WhatsApp, for example, the messaging service moved away from a subscription model to one that was free. Additionally, the services Facebook offer consumers are still free and have benefited from the significant capital investments the company has made in consumer privacy and data protection that totaled $3.7 billion in 2019.

The case also ignores the significant competition Facebook faces in the social media market. Aside from Twitter, which has over 68 million user in the U.S. alone, Facebook also faces competition from TikTok which commends 100 million monthly active users in the U.S. The existence of these powerful companies has forced Facebook to innovate and retain consumer loyalty, despite its significant market power.

To penalize Facebook for its alleged anticompetitive behavior, both the FTC and states are proposing radical changes to the way Facebook operates both now and in the future. The state lawsuit has asked the U.S. District Court to enjoin Facebook from “making further acquisitions valued at or in excess of $10 million” and the court restores “competitive conditions and lost competition and to prevent future violations.” However, the federal suit seeks a more radical relief, calling for Facebook to divest its investments from Instagram and WhatsApp. Considering that both acquisitions that were cleared by the FTC just a few years ago, a move now to breakup the company seems overly harsh.

If the FTC and states feel Facebook has violated antitrust statutes, their case must fully consider the reality of the current competitive environment in the social media market and the numerous benefits the company provides to consumers at no cost. If the FTC cannot prove that Facebook’s alleged behavior has measurably reduced consumer welfare or raised consumer prices, it is very unlikely that any antitrust actions can be justified.

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