The Federal Trade Commission requests Facebook to ‘break-up’

On December 9, 2020, the US Federal Trade Commission (‘FTC’) sued Facebook, together with 46 States, for alleged breach of antitrust laws through a series of anticompetitive practices over the last two decades. In a blunt move reminiscent of the antitrust break-ups of Standard Oil (1911) and AT&T (1982), the FTC is now requesting that Facebook be broken-up by divesting Instagram and WhatsApp.

In essence, the FTC maintains that Facebook illegally built and protected its monopoly position in social networking by neutralising emerging competitors (Sherman Act, Section 2). As a result thereof, the FTC argues that Facebook may have deprived consumers and advertisers from social networking alternatives.

Tighter Scrutiny over ‘Big Tech’

The current action is the last step in a broader context of heightened antitrust scrutiny and regulatory pressure from public authorities around the world against so-called Big Tech or Gafam (i.e., Google, Amazon, Facebook, Apple and Microsoft). The FTC’s lawsuit follows a similar action against Google and the publication of the House Report on Digital Markets, which highlighted significant antitrust issues among Big Tech and, as part of the investigation, previously put their CEOs up against a wall of shame in a series of widely-publicised hearings.

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On the other side of the Atlantic, since 2010, the EU Commission launched a number of antitrust investigations against Google. The search giant was found liable three times (‘Google Shopping’, ‘Android’, ‘AdSense’) and fined a total of €8.5 billion. The EU Commission has renewed the effort by launching a series of probes against Apple in June (‘App Store’, ‘Apple Pay’) and Amazon in November (data and e-commerce practices). EU Member States’ authorities have equally prosecuted Big Tech’s anticompetitive practices with varying degrees of zealousness. From the regulatory perspective, the EU Commission has launched a range of public consultations, including (i) a new competition tool and (ii) an ‘ex ante’ regulatory instrument for ‘gatekeeper’ platforms, which have culminated in an ambitious package to regulate the digital environment with (iii) the Digital Markets Act and (iv) the Digital Services Act, unveiled on December 15.

Facebook’s Anticompetitive Practices

The FTC found that Facebook neutralised emerging competition by (i) targeting and buying-off rising competitors, notably Instagram and WhatsApp; and (ii) restricting software developers’ access to its platform. These allegations fall within two major themes in digital markets’ competition law enforcement.

1.- Killer Acquisitions’:Competition authorities have lately zeroed in killer acquisitions, that is, acquisitions of promising companies by incumbent firms with the purpose to neutralise an upcoming competitive threat. Authorities and academic institutions issued a number of reports –notably, EU Commission, United Kingdom, Germany, Australia and Chicago Booth– denouncing the problem and proposing a variety of solutions. Killer acquisitions typically pose two enforcement problems: (a) control and (b) assessment.

(Este análisis forma parte del ciclo ‘Ojo al Dato’, que produce Agenda Pública para la Fundación «la Caixa»)

Control.-In ‘ex ante’ control systems like the EU, transactions have to be pre-approved by the relevant (EU or national) competition authorities if they surpass certain turnover thresholds. For instance, Facebook’s acquisition of Instagram and WhatsApp were cleared, respectively, by the UK competition authority in 2012 and the EU Commission in 2014. However, start-up acquisitions often escape notification obligations because, at the early stages of development, they often prioritise attracting a large user base without much regard for short-term profits. Indeed, start-ups usually aim to be acquired or to monetize their user base later on. It is thus no surprise that Gafam have engaged in hundreds of start-up acquisitions globally in the last five years, without any being prohibited or preliminarily examined (e.g., Bloomberg and A. Gautier & J. Lamesch). As a result, there is an ongoing policy debate to reform the EU control rules.

In contrast, the US has an ‘ex post’ acquisition control system that does not contain a mandatory notification and pre-approval mechanism. This is precisely what has allowed the FTC to re-open the investigation into Facebook’s activities and contest a breach of competition rules. As the FTC’s letter to Facebook expressly advanced at the time of the acquisition of Instagram, “[t]his action is not to be construed as a determination that a violation may not have occurred […] The Commission reserves the right to take such further action […].” And, indeed, the FTC has now legitimately followed-up. Facebook’s PR claims criticizing the FTC’s lawsuit as “revisionist history” are thus ill-founded. On the other hand, such arguments hold stronger in the EU, where it would arguably not be possible to reopen the vault, given that the EU and UK authorities concluded by ‘final decision’ that the transactions were not problematic.

[Escuche el ‘podcast’ de Agenda Pública: ¿La vacuna es la solución?]

Assessment.- Once spotted, start-up acquisitions need to be assessed for possible competition concerns. That proves particularly difficult ex ante due to the highly dynamic nature of digital markets. Who could have known in 2012 that Instagram –an incipient company with a handful of employees– would become what it is today? Competition authorities will have to broaden their approach to digital markets in favour of a more forward-looking one based on start-ups’ actual competitive potential. This could entail, for instance, looking at key assets and capabilities, as occurs in other innovation-intensive sectors (e.g. pharma and chemical products).

2.- Access to the Platform: Facebook’s interoperability restrictions raise another key policy question: to what extent a gatekeeper must grant access to its own platform? Similar questions were originally triggered by the EU Commission’s Microsoft cases, now revitalized by the landmark Google Shopping decision. In the latter, the Commission found that Google had abused its dominant position in general search by promoting its own comparison shopping services and demoting those of rivals (self-preferencing). Since then, it has become a recurring legal question in the subsequent Google, Apple and Amazon cases and it is now a topic hotly-debated among experts. The awaited judgment of the EU General Court in Google Shopping will provide needed clarity as to the legality and limits of these practices.

Breaking-Up ‘Big Tech’?

This might prove technically impossible in light of Facebook’s strategy to irreversibly integrate its acquisitions. Assuming that it is feasible, such an action would have to be very well grounded due to its (i) chilling effect on investment-innovation and (ii) considerable encroachment on property rights. Moreover, a break-up may not always be the best solution for consumers. It could work in Facebook’s case because Instagram and WhatsApp offer a self-standing value proposition. In other instances, such solution may actually harm consumers by fragmenting a valuable integrated consumer experience, which has famously been at the core of Apple or Google’s offerings.

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