Facebook made the Federal Trade Commission’s naughty list this year. Last week, the FTC filed a lawsuit against social media platform Facebook for creating an illegal monopoly and conducting business in an anticompetitive manner. Attorneys general from 46 states, the District of Columbia and Guam joined the lawsuit which seeks injunctive and other equitable relief against Facebook for violating Section 2 of the Sherman Act and Section 5(a) of the FTC Act.
According to the complaint filed on December 9 in the U.S. District Court for the District of Columbia, Facebook has repeatedly behaved in an anticompetitive way, creating a social media monopoly. Of particular note are the acquisitions of social media platform Instagram (2012) and mobile messaging app WhatsApp (2014). In addition, the FTC alleged that Facebook has imposed requirements on developers to eliminate any potential competition. The Commission’s vote to file for a permanent injunction against Facebook passed 3 to 2 with Commissioners Noah Joshua Phillips and Christine S. Wilson voting no.
Creating an illegal monopoly
The FTC considers Facebook to be “the world’s dominant personal social networking service” that holds an illegal monopoly in that role. Last year, Facebook generated approximately $70.7 billion in revenue with profits approximately $18.5 billion, according to Facebook’s Q4 and full-year 2019 financials. According to Facebook’s third quarter 2020 financials, usage of the social media platform is as follows:
- Daily active users were 1.82 billion on average for September, a 12% increase year-over-year
- Monthly active users were 2.74 billion as of September 30, 2020, a 12% increase year-over-year
- Family daily active people was 2.54 billion on average for September, a 15% increase year-over-year
- Family monthly active people was 3.21 billion as of September 30, 2020, a 14% increase year-over-year
FTC request for relief
The FTC has asked the court for a permanent injunction to divest Facebook of Instagram and WhatsApp, prohibit Facebook from imposing anticompetitive requirements of software developers, and require Facebook to give prior notice and get approval prior to any future mergers and acquisitions to prevent an illegal monopoly down the road.
Statement by FTC
Ian Conner, Director of the Bureau of Competition for the FTC, commented on the agency’s actions and its belief that Facebook has created an illegal monopoly.
“Personal social networking is central to the lives of millions of Americans. Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition. Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive,” Conner said.
In April 2012, Facebook acquired Instagram for $1 billion. Instagram launched in October 2012 to take advantage of the migration away from desktops to mobile devices. The social media platforms focus was initially on photo sharing and has since expanded to advertising, video and ecommerce. The FTC said Facebook chose to acquire Instagram rather than to compete with it. In an internal Facebook memo from Mark Zuckerberg, CEO, wrote, “In the time it has take us to get ou[r] act together on this, Instagram has become a large and viable competitor to us on mobile photos, which will increasingly be the future of photos.” (item 12 in the complaint)
WhatsApp, a popular mobile messaging app, competes directly with Facebook Messenger. According to the FTC, Facebook felt WhatsApp could add competing features or become a social network of its own. The FTC alleges that Facebook acquired WhatsApp to eliminate the threat. The price tag – $19 billion.
“Just as with Instagram, WhatsApp presented a powerful threat to Facebook’s personal social networking monopoly, which Facebook targeted for acquisition rather than competition. Facebook’s control of WhatsApp both neutralizes WhatsApp as a direct threat and, separately, makes it harder for future mobile messaging apps to acquire scale and threaten to enter personal social networking,” says the FTC complaint. (item #21)
Restrictions on third-party developers
A key component of the FTC complaint was Facebook’s imposition of anticompetitive conditions on third-party developers. Developers rely on application programming interfaces (APIs) when creating apps compatible with Facebook. Allegedly, Facebook only shared key APIs to third-party developers if they promised not to develop similar functionalities or promoted other social media platforms. The FTC gave the example of Twitter’s launch of Vine, a short-form video app. The FTC alleges that Facebook shut down the API that would have let Vine access friends through Facebook.
The same day the lawsuit was filed, Facebook posted a response, “Lawsuits filed by the FTC and State Attorneys General Are Revisionist History,” by Jennifer Newstead, vice president and general counsel. One excerpt addresses the acquisitions in question.
“The Federal Trade Commission and state attorneys general today attack two acquisitions that we made: Instagram in 2012 and WhatsApp in 2014. These transactions were intended to provide better products for the people who use them, and they unquestionably did. Both of these acquisitions were reviewed by relevant antitrust regulators at the time. The FTC conducted an in-depth “Second Request” of the Instagram transaction in 2012 before voting unanimously to clear it. The European Commission reviewed the WhatsApp transaction in 2014 and found no risk of harm to competition in any potential market. Regulators correctly allowed these deals to move forward because they did not threaten competition,” wrote Newstead.
“Now, many years later, with seemingly no regard for settled law or the consequences to innovation and investment, the agency is saying it got it wrong and wants a do-over. In addition to being revisionist history, this is simply not how the antitrust laws are supposed to work. No American antitrust enforcer has ever brought a case like this before, and for good reason. The FTC and states stood by for years while Facebook invested billions of dollars and millions of hours to make Instagram and WhatsApp into the apps that users enjoy today. And, notably, two FTC commissioners voted against the action that the FTC has taken today,” Newstead added.
Newstead concluded with the following:
“Facebook as we know it today would not have been possible without US laws that encourage competition and innovation. We’ve been successful because we’ve made risky bets, invested, innovated and delivered value to people, advertisers and shareholders. We have operated and continue to operate in a highly competitive space. Our acquisitions have been good for competition, good for advertisers and good for people. We look forward to our day in court, when we’re confident the evidence will show that Facebook, Instagram and WhatsApp belong together, competing on the merits with great products,” said Newstead.
What does this have to do with subscriptions? Many subscription companies use Facebook as a platform to promote their products and services through organic social media posts and paid advertising. Using Facebook as a portal, some publishers work directly with Facebook to share their online content and to encourage readers to become subscribers. Facebook also launched the Facebook Journalism Project where they work directly with publishers to focus on community-based news, train newsrooms, and develop partnerships.
If the FTC is successful in breaking up Facebook, subscription companies will still be able to promote their products and services through the social media platform. The most significant change would be new ownership of Instagram, which is also used by subscription companies to hawk their wares. Currently, Facebook and Instagram are directly linked which facilitates ease of use between the platforms.
Regardless of the impact to subscription companies, a divesture of Instagram and WhatsApp will have a significant effect on users of the apps, but Facebook isn’t going down without a lengthy and – likely expensive – fight.