The Federal Trade Commission and 46 States Threw the Book at Facebook (and Missed)

By: Justice Clark Litle

Dec 11, 2020 | News

On Wednesday, Dec. 9, another tech juggernaut weathered a firestorm in the form of two major lawsuits.

In October, as we explained on Oct. 22, the Department of Justice (DOJ) went after Google in one of the biggest trust-busting actions in decades. But the case appeared weak, and the share price of Alphabet, Google’s parent, shrugged off the news and rose more than 15% in the weeks that followed.

This time the tech giant in the crosshairs is Facebook Inc. (FB), and once again the case is weak. Facebook investors shrugged off the news, as evidenced by a lack of movement in the stock.

At first glance the action looks formidable. Facebook is being sued by the Federal Trade Commission (FTC) on antitrust grounds and simultaneously, in a parallel lawsuit on similar grounds, by 46 states and 48 attorneys general (the AGs of Guam and the District of Columbia joined in).

“Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition,” said the FTC’s Bureau of Competition director. “Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive.”

In addition to anticompetitive practices, the AG for New York state accused Facebook of making “billions by converting personal data into a cash cow.”

The specific remedy requested is a breakup that spins off Instagram and WhatsApp, two of Facebook’s most important acquisitions. Instagram is the No. 1 photo-sharing app with 1 billion users, and WhatsApp is the No. 1 messaging app with 2 billion users. 

The problem here — for the FTC and the states — is that antitrust cases are hard to win without clear evidence of illegal behavior, and the case looks notably weak.

The core of the case revolves around the Facebook acquisition of Instagram for $1 billion dollars in 2012.

Evidence suggests that Kevin Systrom, the founder of Instagram, was afraid to turn down Zuckerberg’s offer for fear that Facebook would try to destroy Instagram if he didn’t sell.

“Will he go into destroy mode if I say no?” Systrom said. “Probably,” he was told. The idea is to portray Zuckerberg as a kind of Godfather figure, making acquisition offers that tiny startup founders can’t refuse.

The problem here is that it isn’t illegal for a large company to acquire a startup, and the Instagram acquisition was approved in 2012.

Then, too, it was conventional wisdom that Zuckerberg wildly overpaid at the time. When Facebook purchased Instagram, it was an app with 30 million users and baker’s dozen of employees.

Nine years later, Instagram has 1 billion users, but how much of that growth was due to being inside Facebook (where there are thousands of employees), tapped into Facebook’s substantial resources?

The WhatsApp acquisition looked even crazier when Facebook decided to pay $22 billion in 2014. It was conventional wisdom at the time that Zuckerberg was throwing shareholders’ money away and might have lost his mind.

The possibility of failure matters: The Instagram acquisition could have failed or flopped, costing Facebook hundreds of millions to a billion, and the same could have happened with WhatsApp, costing Facebook tens of billions.

The fact the acquisitions worked is testament to Facebook’s management skill — and as Facebook’s antitrust lawyer pointed out, both were approved.

We are skeptical that a pro-free-market judge would look favorably on the notion that a company can take a big financial risk on an acquisition, do everything legally, and then have the acquisition declared illegal later because it succeeded. It is just a bad argument.

As for the FTC argument that Facebook’s actions “deny consumers the benefit of competition,” all Facebook’s lead counsel need do in the courtroom is point to the roster of social media and messaging app competitors that still thrive: Twitter, Snapchat, LinkedIn, YouTube, Reddit, iMessage, and Skype, just to name a few.

Snapchat is notable, too, because Zuckerberg tried to buy them for $3 billion, and the founders turned him down. If Facebook went into “destroy mode” against Snapchat — as Systrom feared would happen with Instagram — the mission failed utterly, because Snap Inc. (SNAP) has a public market valuation of $78 billion as of this writing.

So, the FTC and the states can’t prove Facebook acted illegally in their acquisitions of Instagram and WhatsApp, which were both seen as wildly aggressive bets and both government-approved at the time.

They also cannot prove Facebook is denying consumers the benefit of competition, because plenty of competition exists in the social media landscape.

The New York AG charge that Facebook makes “billions by converting personal data into a cash cow” is also quite weak. As a statement, it is more or less true — but there are dozens of Silicon Valley companies that do that.

To single out Facebook for the exploitation of consumer data, given that such behavior is a Silicon Valley business model, would seem so unfair as to be absurd.   

Facebook does, in fact, engage in questionable practices with consumer data. So do Google, Amazon, and plenty of others.

The problem here is not what a single tech company does or doesn’t do with consumer data, but rather with a lack of logical rules and protections for consumer data.

What consumers need is a kind of citizens’ bill of rights for personal data use, which all tech companies would then comply with, including Facebook. But that would require intelligent government legislation, and the current crop of legislators lacks the focus or the tech smarts to pull off anything like that.

In our view, there really are questions as to whether or not Facebook is too big, and whether or not Facebook has too much power.

It would also be good to rein in Facebook and the other tech giants by giving them a legislative framework, particularly in sensitive areas like personal data rights and political speech.

But the lawsuits we have seen so far — first the Google antritrust effort, and now this one — come across as weak beer.

The latest effort is likely to fail, not just because Facebook will have the best lawyers in the world defending it, but because:

  • There isn’t any proof Facebook’s initial acquisitions were anticompetitive (it’s not illegal to defend market share with acquisitions that are government-approved);
  • There isn’t any case consumers are being harmed (the social media and messaging landscape has plenty of competition);
  • And there isn’t a logical rationale for singling out Facebook’s use of consumer data, when exploiting privacy in exchange for free services is a Silicon Valley pastime. On that note, there is no evidence competitors would be more privacy-minded in the absence of Facebook, either.

All told, society has some real issues with the unchecked power and influence of the tech juggernauts, and that certainly includes Facebook. Unfortunately, the way to deal with these issues is through intelligent legislation, not weak lawsuits with a low likelihood of prevailing in court.

This dual lawsuit Facebook antitrust action, despite the impressive optics of 46 states joining in, is another one investors are likely to wave off — and rightly so.


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