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The US Federal Trade Commission is suing Facebook for anti-competitive action and platform conduct amounting to “illegal monopolisation”.
The US agency says the world's largest social network should spin off Instagram and WhatsApp, the two largest acquisitions and arguably Facebook's largest successes.
“The FTC is seeking a permanent injunction in federal court that could, among other things, require divestitures of assets, including Instagram and WhatsApp," the body said in its groundbreaking lawsuit.
Facebook bought Instagram for $1 billion and WhatsApp for $19bn, taking on hundreds of millions of users and forcing out competition with similar features.
Facebook shares traded at $277.92 late Wednesday, down about 2 per cent on Tuesday’s close.
“Personal social networking is central to the lives of millions of Americans,” said Ian Conner, director of the commission’s Bureau of Competition.
“Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition.
“Our aim is to roll back Facebook’s anti-competitive conduct and restore competition so that innovation and free competition can thrive.”
The commission is also suggesting that the US Federal Court "require Facebook to seek prior notice and approval for future mergers and acquisitions”.
Facebook's general counsel Jennifer Newstead said in addition to being "revisionist history", this is "not how the anti-trust laws are supposed to work".
“No American anti-trust enforcer has ever brought a case like this before … these transactions were intended to provide better products … they unquestionably did ... [they] were reviewed by relevant anti-trust regulators at the time.
“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,” she added.
The two purchases by Facebook were approved by the commission under the Barack Obama administration.
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 that time found no risk of harm to competition in any potential market.
A “second request” is a discovery procedure by which the FTC and the Justice Department investigate mergers and acquisitions that could potentially have anti-competitive consequences.
“Regulators correctly allowed these deals to move forward because they did not threaten competition", Ms Newstead said. "We constantly innovate and invest in better experiences for people against world-class competitors like Apple, Google, Twitter, Snap, Amazon, TikTok and Microsoft."
#BREAKING: I'm leading a bipartisan coalition of 48 attorneys general in a lawsuit against @Facebook to end its illegal monopoly.
— NY AG James (@NewYorkStateAG) December 9, 2020
We are taking action to stand up for the millions of consumers and many small businesses that have been harmed by Facebook’s illegal behavior.
Aside from the Instagram and WhatsApp purchases, the commission says Facebook practised anti-competitive platform conduct to shut down challenges by other social networks.
This included safeguarding and limiting access to its API – that defines interactions between multiple software intermediaries – to third parties, which limited innovation and vital information access and also hurt consumers.
Facebook said the lawsuit risks “sowing doubt and uncertainty” about the US government’s own merger review process and “whether acquiring businesses can actually rely on the outcomes of the legal process”.
“It would also punish companies for protecting their investment and technology from free-riding by those who did not pay for the innovation, making those companies less likely over the long term to make their platforms available to spur the growth of new products and services,” Ms Newstead said.
In addition to the suit filed by the commission, 48 attorney generals in the country are leading a bipartisan lawsuit against Facebook.
The attorney generals from 46 states and two other US regions say the company hurt small businesses and innovation to beat out competition it perceived as a threat to its growing monopoly. They also say Facebook users and consumers have been hurt as a result of its actions.
New York attorney general Letitia James is leading the effort.
The lawsuit demands that Facebook be ordered to ask the state of New York and all other plaintiff states for permission before making any acquisitions of more than $10 million.
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“For nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition, all at the expense of everyday users,” Ms James said in a statement from her office.
“Today, we are taking action to stand up for the millions of consumers and many small businesses that have been harmed by Facebook’s illegal behaviour."
It also encourages the US federal court to take any actions that include divestiture and restructuring.
"Almost every state in this nation has joined this bipartisan lawsuit because Facebook’s efforts to dominate the market were as illegal as they were harmful," Ms James said.
"Today’s suit should send a clear message to Facebook and every other company that any efforts to stifle competition, reduce innovation or cut privacy protections will be met with the full force of our offices.”
The investigations into Facebook-owned companies started last year after the FTC and the Justice Department agreed on a plan to divide up scrutiny of Facebook, Google, Amazon and Apple.
A House report released in October following a 16-month investigation determined the four companies are abusing their market power as gatekeepers over the digital economy.
Defending Facebook, Ms Newstead said the Instagram consumers see today, is the Instagram that Facebook built, not the app it acquired.
“When Facebook bought Instagram, it had about 2 per cent of the users it has today, just 13 employees, no revenue and virtually no infrastructure of its own.
“WhatsApp is no different. Prior to 2014, the texting model in many parts of the world was expensive for consumers,” she added.
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Facebook “quickly recognised” that Instagram was a vibrant and innovative personal social network and an existential threat to Facebook’s monopoly power, the FTC said.
The deal “would not only squelch the direct threat that Instagram posed, but also significantly hinder another firm from using photo-sharing on mobile phones to gain popularity as a provider of personal social networking”, it added.
On the acquisition of WhatsApp, the FTC said Facebook decided it was better to buy the company than compete.
“After Facebook announced the acquisition of WhatsApp, employees internally celebrated the acquisition of probably the only company which could have grown into the next FB purely on mobile.”
Facebook said it has operated in a “highly competitive space” and its acquisitions have been good for “competition and advertisers”.
“We look forward to our day in court, when we are confident the evidence will show that Facebook, Instagram and WhatsApp belong together, competing on the merits with great products,” the company said.