Introduction
The Federal Trade Commission (“FTC”) recently filed an antitrust complaint against Facebook Inc. (“Facebook”), for unlawfully maintaining monopoly in personal social networking market, through anti-competitive practices over the years. The complaint, Federal Trade Commission v. Facebook Inc.,[1]alleged that the company stifled competition from rivals which was in violation of §2 of Sherman Antitrust Act,1890 (“§2”).[2] The complaint majorly focuses on Facebook’s “it is better to buy than compete” strategy.[3] This strategy entailed the acquisition of its budding rivals Instagram in 2012 and WhatsApp in 2014.[4] It has also been alleged that Facebook imposes anti-competitive conditions on software developers for eliminating threats to its dominance.[5] The relief sought by FTC, among other things, requires Facebook to divest Instagram and WhatsApp, and prohibits it from imposing anti-competitive conditions on software developers.
The article aims at undertaking a critical analysis of this complaint by comprehending the law against monopolization in the United States, with special reference to the digital markets, and then examining Facebook’s anti-competitive game-plan upon the touchstone of the discussed law. Additionally, we shall evaluate the reasonableness and practicality of the relief sought by the FTC, and whether that is a viable solution.
Understanding the Law against Monopolization
§2 lays down the offense of Monopolization.[6] In United States v. Grinnell Corp.,[7] the United States Supreme Court stated that stand-alone monopolization is not an offence, and gave the twin-test for what constitutes an offence: (1) the possession of monopolistic power in the relevant market, and (2) the wilful acquisition or maintenance of that power contrary to natural growth or development because of a superior product, business acumen, or historic accident.[8]
The Monopolistic power can be depicted as a position of strength which gives competitive advantage over other rivals in the relevant market in terms of financial resources, technical capabilities, brand value, historical legacy etc.[9] It means dominance enjoyed by the firm, enabling it to operate independently of the competitive forces or affect its competitors, consumers or market in its favour.[10] Such position of dominance is a result of several factors, including the firm’s market share and entry barriers in the market.[11]
Now, the second part requires the firm to abuse this dominant position, through some anti-competitive conduct that results in the acquisition or maintenance of monopoly power.[12] It has been stated by the Courts that,§2 prohibits anti-competitive conduct by way of exclusion in the form of excluding rivals and/or depriving them of their ability to compete.[13] In Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,[14] the Court explained that exclusionary conduct means practices that impair the opportunities of, unreasonably restrict and do not promote meritorious competition. Thus, for constituting an offence, the possession of monopoly power shall be accompanied by an element of anti-competitive conduct.[15]
Monopoly Power in Digital Markets
In United States v. Microsoft Corp., the Court stated that monopoly power in digital markets is generally a result of high entry barriers created by direct network effect.[16] Direct network effect is a phenomenon in which use of any good or service increases its value for other users. Its value to customers increases on one side of the market as the number of customers on the same side of the market increases.[17]For example, in a social media platform like Facebook, a user will only use the platform if the people he wanted to connect with use Facebook. The more people there are who use Facebook, the more incentive there is to use it by another.This is because whenever a customer starts using a particular service/product, he gets attached to it and then promotes it to other people, and as number of customers increases,the utility and effectiveness, that is the value for using the service increases. Moreover, digital markets exhibit high switching costs for customers such as the probability of losing their data such as photos, videos, contacts, friends created on the social media, search history etc, and this discourages the users from switching to other platforms, resulting in existing firms to become a monopoly.[18] Additionally, users tend to develop biases in favour of the platform they are repeatedly using and hence do not switch to other platforms even though they offer superior features.[19]Social networks thrive on this phenomenon because their business model is dependent upon number of users and their attachment to the platform.[20]Due to the user’s inelastic nature of attachment to the platform and the unease of losing data, shifting loyalties entails high cost, thus creating high entry barrier for potential rivals and new entrants in the market.
Facebook’s Strategy vis a vis Antitrust
In 2019, Facebook earned revenue of about $70 billion.[21] Moreover, the Facebook application has the 3rdhighest reach, Facebook Messenger application has the 4thhighest reach, and Instagram application has the 6th highest reach of all mobile apps in America.[22] Furthermore, Facebook has 100% market penetration in nine of the twenty most populous nations, and dominates 95% of all social media market in Americas in terms ofmonthly minutes of usage as compared to its rivals.[23] The statistics given when read with regards to the entry barriers and high switching cost present in digital market, indicates dominant and monopoly power of Facebook.
Now, Facebook’s internal documents categorically show that the top-management perceived Instagram and WhatsApp as critical threat to Facebook’s existence, and that they should be bought in its budding stage before it develops into a worthy rival.[24] Zuckerberg said that the acquisition would aim at neutralising the potential competitors and integrating their product with Facebook’s to improve its service.[25]Additionally, Facebook accepted these two companies as the “biggest risk”ever faced and to “kill” this competition by buying them out was the only viable option, and categorized these platforms as nascent yet ones with rapid growing networks effect, which would disrupt Facebook’s presence in the market.[26]According to Facebook’s leadership, WhatsApp’s user reach and product were outperforming Facebook by miles, and that it would ultimately kill Facebook Messenger by developing into the next Facebook solely on mobile.[27]
Facebook provides services such as the application programming interface (“APIs”) to other businesses and third-party applications for accessing Facebook’s user data.[28] However, it has imposed anti-competitive conditions on these businesses such as prohibiting them from promoting and/or exporting user data to products or services that have same functions as that of core Facebook product or service.[29] Additionally, developers have been prohibited from exporting or using user data to develop a competing social network.[30] This results in cessation and termination of new entrants to the market. Thus,the monopoly power when coupled with Facebook’s anti-competitive conduct categorized as: (1) acquisition of Instagram and WhatsApp for neutralizing competition, and (2) imposition and enforcement of anti-competitive conditions on access to APIs satisfies the twin-test laid down for establishing violation of §2.
Is the Relief Sought Pragmatic?
Seeking the divesture of Facebook’s assets as a relief reminds of the mammoth American antitrust case of United States v. American Tel. and Tel. Co.[31] During the 1970s, AT&T was the sole provider of telephone service in major portions of America. Additionally, most of the telephonic equipments used in America were manufactured by Western Electric, a subsidiary of AT&T.[32] As a result, AT&T possessed monopolistic power over the tele-communication market. So, in 1974, the United States Department of Justice initiated an antitrust lawsuit against AT&T, and requested divestiture of ownership of Western Electric.[33] The case ended in 1984 with AT&T retaining Western Electric, but resulted in AT&T’s divesture and breakup into 7 independent Companies known as “Baby Bells”, reducing the book value of AT&T by approximately 70%.[34] Similarly, there are several other cases in which divestiture of assets was sought, and the courts granted it.
Hence, seeking the separation of Instagram and WhatsApp from Facebook is nothing out of the ordinary. However, one must understand that after acquiring both these companies, Facebook has nurtured and developed them into much bigger platforms than what they were initially.Instagram and WhatsApp have become dependent upon their parent company, Facebook, in terms of financial resources, technical infrastructure and monetization strategies. Their work forces are also integrated.[35]
This is because Facebook has unified the platforms so as to increase the interoperability between the services, and it is increasingly becoming convenient for the consumers. For example, users can easily access Facebook’s messenger service through Instagram’s application.[36] Additionally, Instagram relies on Facebook’s artificial intelligence-based moderation systems that are used to identify and remove hate speech, provocative violent content, terrorist propaganda etc.[37] This not only makes breaking up these platforms difficult, as it would require technical and organizational restructuring of both the platforms, it also goes against the antitrust principles of consumer benefit.
Furthermore, WhatsApp and Instagram are now part of Facebook’s monetization model.[38] Instagram before its acquisition in 2012, had no source of sustainable income as its annual revenue then, indicated losses valued at around two million dollars,[39] and had about 2% of the users it has today.[40] In 2019, it generated revenue of around 20 billion dollars, which is attributable to the financial and technological backing of Facebook.[41] Moreover, it is estimated that Instagram’s total ad revenue amounts to 37% of Facebook’s. Also, Instagram has surpassed Facebook in terms of users in several countries.[42] This means that the divestiture will not only negatively impact Facebook’s revenue but also might leave Instagram without any source of reliable income.[43]
On the other hand, Facebook has taken WhatsApp from 450 million users in 2014 before its acquisition,[44] to above two billion as of 2020.[45] Additionally, WhatsApp instead of generating profits for Facebook, focused on user growth and providing free services to the users, which, without Facebook’s deep pockets, would have been burdensome.[46] Separating WhatsApp from Facebook might require users to pay for using the WhatsApp platform, as was the case before its acquisition, and this may result in shifting of users to substitute applications.[47]
The WhatsApp and Instagram that exist today are the ones in which Facebook invested heavily and those that were built from a small-scale.[48] The authorities cannot simply breakup and abandon a company or its economic conditions will plummet. This is because the social networking market is based upon the business model of providing their users’ information such as their preferences towards a product and their activity on the internet to advertiser, who then utilise this data for customized consumer targeting.[49] Since such data is accumulated over a period of time, and will not be immediately available to Instagram and WhatsApp without Facebook’s help (such as providing data initially for some period of time or assisting in collection and analysis of the data), the companies will not be able to monetize their services. Thus, absolute freedom from Facebook would be difficult to grant.
These crackdowns on Silicon Valley’s Big Tech firms reaffirms that antitrust regulators will hit hard on anyone who hurts competition. Even though technological revolution and the development of these tech giants gave extraordinary benefit to people worldwide, their conduct shall not go unchecked. Balance is required in this dynamic market.
This article has been authored by Alay Ninad Raje, Second-year student, Institute of Law, Nirma University.
[1] Federal Trade Commission v. Facebook, Inc., Complaint filed by Federal Trade Commission (FTC), (United States District Court of Columbia).
[2] The Sherman Antitrust Act,1890 (26 Stat. 209, 15 U.S.C), § 2, (USA).
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony”
[3] Federal Trade Commission v. Facebook, Inc., Complaint filed by Federal Trade Commission (FTC), (United States District Court of Columbia), at 21.
[4] Id.
[5] Id., 7.
[6] The Sherman Antitrust Act,1890 (26 Stat. 209, 15 U.S.C), § 2, (USA).
[7] United States v. Grinnell Corp., [1966], 384 U.S. 563, 570–71.
[8] United States v. Grinnell Corp., [1966], 384 U.S. 563, 570–71, at. 383-384.
[9] Id.,384.
[10] United States v. Aluminum Co. of America (Alcoa), [1945], 148 F.2d 416 (2d Cir.).
[11] United States v. American Tel. and Tel. Co. (AT&T), [1983], 552 F. Supp. 131 (D.D.C.), at170.
[12] Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, [2004], 540 U.S. 398, 407.
[13] Andrew Gavil, William Kovacic and Jonathan Baker, Antitrust Law in Perspective: Cases, Concepts and Problems in Competition Policy (American Casebook Series),45(2nd ed., 2002).
[14] Aspen Skiing Co. v. Aspen Highlands Skiing Corp., [1985], 472 U.S. 585, 105 S. Ct. 2847.
[15] United States v. Aluminum Co. of America (Alcoa), [1945], 148 F.2d 416 (2d Cir.).
[16] United States v. Microsoft Corporation, [2001], 253 F.3d 34 (D.C. Cir.), at50.
[17] Dina Srinivasan, The Antitrust Case Against Facebook: A Monopolist’s Journey Towards Pervasive Surveillance in Spite of Consumers’ Preference for Privacy, 16 Berkeley Business Law Journal 39, 54 (2019).
[18] See Barbara Engels, Data portability among online platforms, 5(2) Internet Policy Review (2016).
[19] Id.
[20] ML Katz and C Shapiro, Network Externalities, Competition and Compatibility, 75 American Economic Review 424 (1985).
[21] Federal Trade Commission v. Facebook, Inc., Complaint filed by Federal Trade Commission (FTC), (United States District Court of Columbia).
[22] SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND ADMINISTRATIVE LAW OF THE COMMITTEE ON THE JUDICIARY, Investigation of Competition in Digital Markets, (USA, 2020), at137.
[23] Id., 138.
[24] Federal Trade Commission v. Facebook, Inc., Complaint filed by Federal Trade Commission (FTC), (United States District Court of Columbia), at 26.
[25] SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND ADMINISTRATIVE LAW OF THE COMMITTEE ON THE JUDICIARY, Investigation of Competition in Digital Markets, (USA, 2020), at 152.
[26] Id., 153.
[27] Federal Trade Commission v. Facebook, Inc., Complaint filed by Federal Trade Commission (FTC), (United States District Court of Columbia), at 37.
[28] Id., 39.
[29] Id., 42.
[30] Id., 43.
[31] United States v. American Tel. and Tel. Co. (AT&T), [1983], 552 F. Supp. 131 (D.D.C.), at 157, 161.
[32] Id, 137-145.
[33] Id., 137-145.
[34] Id.
[35] Bloomberg, Facebook Breakup Would Demolish Zuckerberg’s Social Media Empire, December 10, 2020, available at https://www.bloomberg.com/news/articles/2020-12-10/facebook-breakup-would-demolish-zuckerberg-s-social-media-empire (Last visited on December 24, 2020).
[36] The New York Times, Zuckerberg Plans to Integrate WhatsApp, Instagram and Facebook Messenger, January 25, 2019, available at https://www.nytimes.com/2019/01/25/technology/facebook-instagram-whatsapp-messenger.html (Last visited on December 24, 2020).
[37] The Verge, Facebook is now using AI to sort content for quicker moderation, November 13, 2020, available at https://www.theverge.com/2020/11/13/21562596/facebook-ai-moderation (Last visited on December 24, 2020).
[38] Bloomberg, supra note 35.
[39] Santiago Zapata and Aurelija Ulbinaite, Business Integration as a Strategy of Growth in the Social Media and Network Markets: The Case of Facebook, Research Gate (2017), at 197.
[40] Facebook, Lawsuits Filed by the FTC and the State Attorneys General Are Revisionist History, December 9, 2020, available at https://about.fb.com/news/2020/12/lawsuits-filed-by-the-ftc-and-state-attorneys-general-are-revisionist-history/ (Last visited on January 20, 2021).
[41] Bloomberg, Instagram brings in more than a quarter of Facebook sales, February 4, 2020, available at https://www.bloomberg.com/news/articles/2020-02-04/instagram-generates-more-than-a-quarter-of-facebook-s-sales (Last visited on January 20, 2021).
[42] Bloomberg, Facebook Sees WhatsApp As Its Future, Antitrust Suit or Not, December 9, 2020, available at https://www.bloomberg.com/news/features/2020-12-09/facebook-fb-plans-to-turn-messaging-app-whatsapp-into-a-moneymaking-business (Last visited on January 20, 2021).
[43] Bloomberg, supra note 35.
[44] Zapata, supra note 39, 199.
[45] Bloomberg, supra note 35.
[46] Bloomberg, supra note 35.
[47] Zapata, supra note 39, 198.
[48] Facebook, supra note 40.
[49] Srinivasan, supra note 17.
Picture Source: Cointelegraph
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