The federal and state governments’ antitrust lawsuits, filed Dec. 9, depict Facebook as a monopoly social network that eliminated WhatsApp and Instagram as nascent competitors by acquiring them in 2012. They also allege that Facebook’s licensing terms are overly restrictive.
The agencies allege this conduct perpetuated Facebook’s monopoly, in violation of Section 2 of the Sherman Act, which prohibits monopolization of “any part of the trade or commerce among the several States….”
The antitrust agencies will face several challenges convincing the courts that traditional monopolization law is up to the task of reigning in Facebook. The last time U.S. antitrust authorities brought a significant monopolization case was 20 years ago, when the government successfully argued that Microsoft unlawfully maintained its monopoly in PC operating systems by stifling the growth of middleware platforms, Java and Netscape in U.S. v. Microsoft Corp.
The case against Facebook (the state and federal cases are expected to be consolidated) bears many similarities to the 20-year-old Microsoft case:
- As in Microsoft, the government contends that Facebook stymied potential competitors in order to maintain its monopoly, depriving consumers of choice, value, and innovation.
- As in Microsoft, Facebook’s monopoly is alleged to be protected by high barriers to entry created by strong network effects.
- And, as in Microsoft, the government seeks a structural remedy to restore competition, namely, the divestiture of Instagram and/or WhatsApp.
It also appears that Facebook’s conduct fits the two elements of the offense of monopolization—possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power by means other than competition on the merits. It remains to be seen, however, whether the elements of monopolization truly fit the Facebook case and, indeed, whether the resemblance to Microsoft is more than superficial.
Considering whether Facebook possesses monopoly power will be the first step in the court’s analysis.
The U.S. Supreme Court defines monopoly power as the power to control prices or exclude competition. Facebook is alleged to possess monopoly power even though its social network is priced at zero. For this reason, the agencies focus on so-called “non-price” harm to consumers, i.e., impaired quality, privacy, or innovation. But the court may not consider such harms as evidence of Facebook’s power to control prices when it charges zero for the underlying service.
The antitrust agencies will also argue that Facebook can exclude competition. Aside from the Instagram and WhatsApp acquisitions, Facebook is alleged to have used its licensing terms to restrain third parties from promoting rival social networks. But this conduct amounts to the power to exclude competition only if there is proof that potential rivals actually have been foreclosed from reaching the market.
Finally, the agencies argue that Facebook has raised the price of advertising above the competitive level. Yet, they fail to allege a market for social network advertising or that Facebook would possess monopoly power in any market serving online advertisers.
Market Share and Barriers to Entry
Sometimes the evidence of market power is clear, such as when a firm cuts back the market’s output in order to raise prices. More typically, though, market power is shown through circumstantial evidence, usually a dominant market share protected by barriers to competitive entry. The complaints allege that Facebook’s market share in excess of 60% and “direct network effects” make it very difficult for a new entrant to displace a network in which friends and family already participate.
Microsoft also enjoyed a dominant market share (in excess of 90%) and understood that by slowing adoption of Java or Netscape until a critical mass of applications were developed for Windows, its monopoly would become durable, because porting applications from one platform to another is costly.
By contrast, switching to an alternative social network is far less costly than redesigning software, particularly if user data is either portable or reproducible. The relative ease with which users can switch networks belies the Microsoft analogy and casts doubt on the durability and evidentiary value of Facebook’s dominant market share.
The relevant market alleged in the Facebook case is the “personal social network services” market, a free service that can be openly replicated. By contrast, the monopolist in the PC operating system market sold high-priced software for which there was no substitute.
The relevant market is supposed to include all products or services that are reasonably interchangeable for the same purpose. In Microsoft, no product could substitute for Windows. But, any number of current or future networked applications could emerge as a substitute for Facebook.
Buying the Competition
To be anti-competitive, it is not enough that Facebook’s acquisitions of Instagram and WhatsApp removed these firms as stand-alone entities. The agencies have to prove that they likely would have emerged as competing personal social networks.
The evidence in Microsoft was clear that Java and Netscape could threaten the position of the Windows OS. The competitive threat posed by Instagram and WhatsApp seems by comparison far less evident. These firms might have become significant competitors, unlike Java and Netscape, they possess no unique attributes that would enhance their capacity to do so.
The remedy the agencies seek is divestiture of Instagram and/or WhatsApp. Whether this relief will create meaningful competition among multiple personal social networks is debatable.
The government’s track record in creating new competitors is less than stellar. For example, as a condition to the Sprint/T-Mobile merger earlier this year, the parties were ordered to divest the Boost Mobile wireless assets to Dish Network. Consumers have yet to see any real competition from Dish, which currently serves fewer than 10 million wireless subscribers.
Similarly, the FTC required Hertz to stand up Advantage as new rental car company as a condition to its acquisition of rival Dollar/Thrifty in 2013. Four months later, Advantage filed for bankruptcy.
The government’s case was largely successful in what the Microsoft court called “technological markets characterized by network effects.” It remains to be seen whether the authorities bringing the Facebook case will meet with equal success in the new, cyberspace version of those markets.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jonathan Rubin is a partner and founder of MoginRubin LLP. He was formerly an antitrust partner at Patton Boggs LLP in Washington, D.C. He has focused exclusively on antitrust and competition law and policy and has led trial teams in major antitrust cases around the country.
Jennifer M. Oliver is a partner at MoginRubin LLP where she specializes in antitrust and unfair competition litigation. She also provides competition and privacy diligence counseling to M&A practitioners and their clients, and is an IAPP Certified Information Privacy Professional in the U.S.