FTC, States Suing Facebook to Split Up the Social Media Giant

Other tech companies will be keeping a close eye on the federal government and more than 40 states suing Facebook to break it up.

451 Research’s Raul Castanon

That’s according to Raul Castanon, senior research analyst with 451 Research, part of S&P Global Market Intelligence.

The Federal Trade Commission (FTC) and 46 states are suing Facebook, alleging it’s illegally maintaining its personal social networking monopoly through a years-long course of anticompetitive conduct.

The complaint alleges that Facebook has engaged in a “systematic strategy” to eliminate “threats to its monopoly.” That includes its 2012 acquisition of up-and-coming rival Instagram and its 2014 acquisition of mobile messaging app WhatsApp. It also includes imposing anticompetitive conditions on software developers.

In suing Facebook, the FTC is seeking a permanent injunction in federal court that could, among other things;

FTC’s Ian Conner

“Personal social networking is central to the lives of millions of Americans,” said Ian Conner, director of the FTC’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 anticompetitive conduct and restore competition so that innovation and free competition can thrive.”

Dominance Challenges

Facebook’s dominance across several intersecting domains — including content, social messaging and digital advertising — presents challenges because of the influence it can impose on the market, Castanon said.

“Its unique position enables Facebook to influence what users are exposed to,” he said. “This in turn can affect their behavior and purchasing decisions. Since it competes with other players, the situation lends itself to a conflict of interest. It’s fair to assume that other tech companies will be keeping an eye on the outcome of the Facebook story since Google/YouTube are in a similar situation.”

Furthermore, in the case of Facebook, it’s a situation that is becoming increasingly complex with its recent acquisition of CRM startup Kustomer, Castanon said.

“Given its dominance with social channels like Facebook Messenger Instagram and WhatsApp, which are becoming increasingly relevant for customer engagement, this creates more potential for conflict of interest, he said.

Buying Instead of Competing

According to the FTC’s complaint, Facebook initially tried to compete with Instagram by improving its own offerings. But Facebook ultimately chose to buy Instagram for $1 billion rather than compete with it. The acquisition allegedly both neutralizes the direct threat posed by Instagram, and makes it more difficult for another personal social networking competitor to grow.

The complaint also alleges that Facebook chose to buy an emerging threat rather than compete when it purchased WhatsApp for $19 billion.

In addition, the complaint alleges Facebook denied software developers’ access to valuable interconnections to its platform. In particular, Facebook allegedly has made key APIs available to third-party applications only on the condition they refrain from developing competing functionalities, and from connecting with or promoting other social networking services, it said.

The complaint alleges that Facebook has enforced these policies by cutting off API access to perceived competitive threats from rival personal social networking services, mobile messaging apps and other apps with social functionalities.

Revisionist History

Facebook’s Jennifer Newstead

Jennifer Newstead is Facebook’s vice president and general counsel. She said the Instagram and WhatsApp 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. And 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,” she said. “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.”

In terms of software developer access, Newstead said this restriction is standard in the industry. Where platforms give access to other developers — and many do not provide access at all — they usually prohibit duplication of core functions.

“LinkedIn, The New York Times, Pinterest and Uber, to name a few, all have similar policies,” she said. “Companies are allowed to choose their business partners, and it gives platforms comfort that they can open access to other developers without that access being exploited unfairly. What’s more, the policy had no impact on competition. YouTube, Twitter and WeChat, for example, have done just fine without our platform. Significantly, Facebook did nothing to prevent any apps from offering their services on their own sites or anywhere else on the internet.”