Facebook has only itself to blame for drastic antitrust suits

The social media giant always intended to thwart competition by acquiring start-ups like Instagram and WhatsApp

A woman checks the Facebook Inc. site on her smartphone whilst standing against an illuminated wall bearing the Facebook Inc. logo in this arranged photograph in London, U.K., on Wednesday, Dec. 23, 2015. Facebook Inc.s WhatsApp messaging service, with more than 100 million local users, is the most-used app in Brazil, according to an Ibope poll published on Dec. 15. Photographer: Chris Ratcliffe/Bloomberg

Mark Zuckerberg always knew.

In 2012, when Instagram was two years old, with 13 employees and no obvious path to profitability, Zuckerberg knew that the fast-growing photo app was a potential threat to Facebook’s social media dominance.

“Instagram can hurt us,” he wrote in an email. In an internal discussion about whether to buy Instagram – and other start-ups that might one day pose a threat to Facebook’s social media monopoly – he added: “The basic plan would be to buy these companies and leave their products running while over time incorporating the social dynamics they’ve invented into our core products.”

Kevin Systrom, Instagram’s co-founder, knew something, too. He knew that angering Mr Zuckerberg might cause the “wrath of Mark” to come down on his still-fragile company and cause Facebook’s founder to go into “destroy mode,” as he put it in a text message to one of Instagram’s early investors.

Yes, Instagram might one day become a significant competitor to Facebook – but it was also possible that Facebook would clone Instagram’s technology and put the start-up out of business. So in April 2012, when Mr Zuckerberg offered to pay $1 billion for the company, Mr Systrom and the Instagram board said yes.

But when it sought to get the deal approved by the Federal Trade Commission in the US and the Office of Fair Trading in the UK, Facebook argued with a straight face that there was plenty of competition from other photo apps like Camera Awesome. And the two government agencies were also convinced that because Instagram had no revenue, a merger with Facebook wouldn’t meaningfully add to its market share. The two regulators took only four months to approve the deal. But of course, they didn’t know what Mr Zuckerberg and Mr Systrom knew.

On Wednesday afternoon, the FTC and 48 attorneys general filed dual antitrust suits designed to undo the merger of Facebook and Instagram – as well as Facebook’s takeover of WhatsApp, another potential rival that it bought in 2014 for a staggering $19bn. (WhatsApp also had no revenue and 55 employees at the time Facebook bought it.)

This is a radical proposition – the US government hasn’t contemplated breaking up a company since the Justice Department sued Microsoft in 1998. But I’ve long believed that there is simply no other way to curb Facebook’s immense monopoly power.

In the attorneys general complaint, the plaintiffs contend that Facebook employs a “buy-or-bury strategy that thwarts competition and harms both users and advertisers”. One would be hard pressed to disagree. Venture capitalists are so fearful of Facebook’s ruthless tactics they simply won’t fund start-ups that Mr Zuckerberg might view as competition, no matter how insignificant. Thus is innovation stifled, as is competition itself.

Quote
The basic plan would be to buy these companies and leave their products running while over time incorporating the social dynamics they've invented into our core products

As a result, the plaintiffs contend, social media consumers don’t have legitimate choices. If they don’t like Facebook’s privacy policies, or if they want fewer ads, or are offended by Facebook’s unwillingness to face squarely the amount of disinformation on its platform, what are their options? Move to Instagram? Or WhatsApp? They are still in Facebook’s universe, which can still use their data to make oodles of money.

Mr Zuckerberg has apologised a dozen times or more for some Facebook missteps and promised to do better. Nothing much changes. Facebook agreed to a settlement with the FTC in 2012 over what the agency called “privacy-related violations” – and then had to pay a $5bn fine seven years later for violating the terms of that settlement. One reason to break up Facebook is that less onerous remedies have simply failed to make a difference. Facebook has proved again and again that it doesn’t take government mandates seriously.

As the economist Hal Singer put it in a tweet soon after the complaint was filed, “There is no injunctive or behavioural cure that can remedy this mess. Facebook’s anticompetitive conduct defies traditional [regulatory] approaches.”

The second reason to break up Facebook is that it is the only way to create competition in the social media business – and to create it instantly. Instagram now has more than 1 billion monthly active users. WhatsApp has more than 1.6 billion. What’s more, before Facebook bought them, the two companies had much different approaches to matters such as privacy and even profitability.

Facebook CEO Mark Zuckerberg testifies before a joint hearing of the US Senate Commerce, Science and Transportation Committee and Senate Judiciary Committee on Capitol Hill, April 10, 2018 in Washington, DC. - Zuckerberg offered apologies to US lawmakers Tuesday as he made a long-awaited appearance in a congressional hearing on the hijacking of personal data on millions of users. (Photo by JIM WATSON / AFP)

For instance, WhatsApp's chief executive, Jan Koum, left Facebook in 2018 after a "clash over data" as the Washington Post put it at the time. Mr Koum had long kept the data of WhatsApp users private, but Mr Zuckerberg had decided the time had come for Facebook to start monetising it.

A WhatsApp that was divorced from Facebook might well establish itself as an alternative to Facebook’s data practices. Indeed, that’s what it was before it was acquired in 2014. The same could be true of Instagram. They wouldn’t compete with Facebook on price, obviously, but on all the other things social media users care about.

It’s no secret that government antitrust cases are difficult to win in court, where judges have heavily favoured consolidation in recent decades. Facebook will argue – as it already has – that it won government approval of the deals fair and square. “Years after the FTC cleared our acquisitions, the government now wants a do-over,” the company said in a tweet.

But reducing Facebook’s power is one of the few issues that Republicans and Democrats agree on, and as my colleague Tae Kim notes, David Cicilline, the chair of the House antitrust subcommittee, would be well served to craft a bill that would make it easier to curb the power of the big technology companies, starting with Facebook.

As for the antitrust suits, breaking up Facebook isn’t just the right solution, it’s the only solution.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast “The Shrink Next Door”.

EDITOR'S PICKS
NEWSLETTERS