Proving That Facebook Has a Monopoly Is Harder When It’s Free

Dec. 10, 2020, 11:01 AM

The antitrust cases against Facebook Inc. face an uphill battle as the Federal Trade Commission and a coalition of state attorneys general look to prove the tech giant has an anticompetitive monopoly in social networking when users don’t pay for its products.

The cases hinge on the ability to prove that Facebook bought companies, including Instagram and WhatsApp, in order to kill off upstart rivals, and to convince the court that the social media industry would be more competitive if the deals had not been consummated.

Federal antitrust law already tends to favor defendants, with the burden falling on the government to show how a company’s actions hurt competition.

But the Facebook case presents an additional challenge. Unlike most antitrust suits, federal and state enforcers can’t point to a price change to show how Facebook’s acquisitions raised costs for users, because the company offers its platform for free.

Instead, the government is alleging that Facebook’s monopoly power stifled innovation and left consumers with sub-par social media options.

“There is always some fortune-telling aspect” in proving that a merger is likely to harm a market or that a certain industry would have been more successful and innovative without the deal, said Jennifer Oliver, an antitrust partner at Moginrubin LLP.

“I think it is more challenging here with a deal between tech companies, where the marketplace is evolving so rapidly,” Oliver said. “What ultimately takes down most of these tech companies is disruption and evolution, and so it’s hard to say that even now that Facebook will be dominant forever,” she added.

Zero Price Dilemma

The FTC and attorneys general from 46 states, along with Guam and the District of Columbia, filed separate lawsuits Wednesday in the U.S. District Court for the District of Columbia accusing Facebook of violating antitrust laws. The complaints cited Facebook’s purchases of Instagram in 2012 and WhatsApp in 2014, and the company allegedly cutting off third-party apps’ access to its platform if they presented a competitive threat.

The government officials are asking the court to ban Facebook’s alleged anticompetitive conduct and consider forcing the company to sell off assets, including Instagram and WhatsApp.

The FTC has had success in undoing mergers in the past, but those victories mainly have centered on unwinding hospital mergers in cases where the government could show consumer prices rose once the deal was completed.

Attempting to undo Facebook’s deals with Instagram and WhatsApp will force the FTC and the states to prove that consumers were harmed not by higher prices, but by being deprived of additional social media options and afforded less privacy protections.

The lawsuits do allege that advertising prices went up because Facebook’s monopoly power prevented competition in the ad space, but don’t elaborate how those higher ad prices ultimately harmed consumers.

“The price effects for consumers aren’t here, and that’s typically the easily provable way” to show that a deal harmed competition, said Sam Weinstein, a professor at Cardozo Law School who previously served as a Justice Department antitrust attorney.

“The FTC does allege consumers were harmed by less innovation, but that can be challenging to prove when end-users are not paying in dollars for the product or service,” he said.

Proving Monopoly

Proving that Facebook has monopoly power also presents a difficult task because the company operates in a dynamic and evolving tech market.

The states say Facebook employed two strategies to kill competition: buying up rivals such as Instagram and cutting off access to its platform.

Facebook argues that its market power is far below a monopoly because it competes with other companies like Twitter Inc., TikTok, Amazon.com Inc., and Alphabet Inc.'s Google for social media users and advertising dollars.

“People and small businesses don’t choose to use Facebook’s free services and advertising because they have to, they use them because our apps and services deliver the most value,” Jennifer Newstead, Facebook’s vice president and general counsel, said in a statement in response to the suits. “We are going to vigorously defend people’s ability to continue making that choice.”

The FTC and states are “going to have to convince the court that Facebook is dominant, not simply big,” said Herbert Hovenkamp, an antitrust professor at the University of Pennsylvania Law School.

“We’ve got guidelines for mergers, but if you punch the market share numbers on these companies into those guidelines, it’s not at all clear that these mergers would be anticompetitive,” Hovenkamp said.

Eliminating Competition

In addition to proving that Facebook is a monopoly, federal and state regulators need to persuade the court that Facebook used its power to crush competition by purchasing Instagram and WhatsApp.

Facebook itself may have made that element of the case easier for regulators.

Internal emails from Facebook CEO Mark Zuckerberg that call Instagram a “threat” and other documents cited in the complaints are expected to illustrate the case that the deals were anticompetitive.

“The FTC has its work cut out for it in laying out what competition would have looked like except for the mergers, but that’s not an impossible task,” said William Kovacic, a George Washington University Law School professor who chaired the FTC from 2008-2009.

To contact the reporters on this story: Jon Reid in Washington at jreid@bloomberglaw.com; Victoria Graham at vgraham@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Keith Perine at kperine@bloomberglaw.com

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