Current Affairs

Break Up Facebook, But That’s Just The Start

The FTC suit against Facebook has limited aims and long odds.

Last week the Federal Trade Commission (FTC)—empowered to promote competition in U.S. markets—sued Facebook for purposefully buying up threatening startups. Facebook has long been in the habit of buying up independent companies that might compete with its $800 billion social media network, acquiring Instagram and WhatsApp among many others. A group of 46 states is separately suing Facebook for the same reason as the FTC, arguing that by purchasing Instagram and WhatsApp, the company was able to secure its monopoly power over the social media marketplace. Both suits also allege antitrust violations in the platform’s practice of monitoring the use of apps that run on Facebook, and blocking access to those the company judged to be threats to its core business model. The legal actions are pursuing a breakup of the company, forcing it to sell off these units to restore competition to the marketplace.

But much like the Department of Justice’s recent action against Google for paying to make its browser and search engine the default on mobile phones, the Facebook suits have pretty modest prospects. Unlike other jurisdictions like the European Union, U.S. antitrust law is notoriously weak, allowing monopolies but barring “monopolization,” the use of an existing monopoly to take over other markets. And also unlike the European Union, the FTC or DOJ must win in court against the accused companies, which of course have an ocean of cash and white-shoe attorneys to fight the charges. The outcome will likely take years to become clear, but based on past episodes like the Microsoft antitrust trial, the odds are on Zuckerberg’s side.

Submerged

Of course, Facebook was gigantic and growing before it bought the companies in question. This is largely due to an economic phenomenon called “network effects,” where a good or service gains value as more people buy it. Take telephone service, for instance—more users on the network increase the value of telephony to each individual user. Facebook is about the clearest case possible of such a dynamic, since a social network with all your friends on it is far more valuable than 10 networks with 1/10 of your friends on each. The company is now literally a textbook example of the process.

The FTC even recognizes this dynamic in its filing, but argues (with some truth) that even dominant incumbents protected by network effects can be potentially challenged by newcomers as new technology becomes available, like the greater cellular bandwidth that allowed the rise of picture-based mobile-first apps like Instagram. But no one expects a potentially independent Instagram to deal a crippling loss of users to Facebook’s billions-strong user base—a successful breakup would lead at best to an oligopoly, with a few giant companies dominating a market, rather than Facebook’s current near-monopoly.

The stakes are high, as Instagram in particular has become central to Facebook’s business model, with a billion users and a major contribution to the platform’s ad-based revenue stream. Instagram’s founder initially snubbed Facebook founder and CEO Mark Zuckerberg’s overtures, but acquiesced to negotiations due to his fear Zuckerberg would “go into destroy mode,” according to emails made public during the House Antitrust Subcommittee’s summer hearings on Big Tech. Zuckerberg wrote to associates that Instagram “could be very disruptive to us,” and “it is better to buy than compete.” Steamy!

Federal Betrayed Commission

Facebook has had regular business with the FTC, including a giant $5 billion fine paid just last year after the watchdog sued it over wild privacy violations. But despite this history and the risqué emails, it’s far from clear that the FTC or the states can win their case in the federal courts, “which have become more conservative and have weakened antitrust precedents in recent decades,” as the Wall Street Journal put it. 

Market watchers have noted the government’s poor record on those cases that do go to court, including most disgracefully losing a case blocking the merger of cell service providers Sprint and T-Mobile, tightening the cellular data oligopoly from four giants to three. Cases brought by the FTC, DOJ, or the states against chip maker Qualcomm, card issuer American Express, and media behemoth AT&T also failed in court. 

Most crucially, when Facebook originally merged with its social media rivals, the government actually signed off on them. The FTC unanimously approved Facebook’s 2012 acquisition of Instagram, and the purchase of WhatsApp the same year didn’t even receive a full review. However, the approval letters did leave open the possibility of future action, stating: “This 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 as the public interest may require.” The business press credits the souring of the public mood toward Big Tech with the renewed investigations.

Shooting Messenger

Even granted an eventual court victory, breaking up the company has significant technical challenges. The federal government hasn’t broken up a firm approaching this size since AT&T in 1982, and its closest attempt—the 1990s-era case against platform giant Microsoft—has several cautionary lessons. Microsoft was sued by the DOJ for using its existing Windows operating system monopoly for PCs to take over adjacent markets in Web browsing, packaging its wretched trash browser, Internet Explorer, with Windows updates in order to crush the popular independent browser Netscape. 

Microsoft was legally adjudicated to be a monopoly and ordered broken up, but its appeal of the verdict stretched into the George W. Bush administration. Bush’s Justice Department dropped the goal of breaking up the company. The company ultimately got away with “behavioral” requirements, like presenting buyers of new PCs with a “choice screen” allowing them to choose a browser, yet the company failed to reliably include even this wimpy remedy in later Windows updates.

During the court battle, Microsoft argued its browser was an integral part of its Windows OS, and indeed commingled the software code aggressively. Court testimony by Apple engineers and others undermined this claim by indicating that operating systems and browsers are readily used separately, and that Microsoft was merely insisting they would be far less useful separately in order to resist breakup. 

Likewise, Facebook is now claiming that a forced divestiture (a legal mandate to sell off part of a company, usually just called a breakup) would be excessively messy and complicated, especially for Instagram. Ads may be routed to Instagram or Facebook proper based on daily traffic, and company staff move back and forth. However, the industry’s history of unnecessary commingling suggests that the company will play up this issue, regardless of how daunting it really is. Due to its heavy use of encryption, WhatsApp is less integrated with Facebook proper and could represent an easier cleaving.  

Terms of Serfdom

But no matter how the FTC-states suit goes, it’s undeniable that absent government interference, the market itself puts up no barriers to monolithic market outcomes, just as in every other market that became monopolized through history. Hell, markets incentivized Facebook’s acquisitions, since they allowed broader ad-buying options and more user data-collecting opportunities. Further, preemptively buying up rivals can bring monopoly power and pricing muscle, as U.S. monopolies from oil to drugs to software have shown. While conservatives and libertarians continue to insist that free markets bring continual competition and reward only efficient firms that serve the public, the reality was seen more clearly by the great socialist writer George Orwell. In a review of Friedrich Hayek’s dismal book Road to Serfdom, Orwell concluded that “The trouble with competitions is that somebody wins them. Professor Hayek denies that free capitalism necessarily leads to monopoly, but in practice that is where it has led.” 

As I argue in my worldwide smash hit book Bit Tyrants, a real solution to the troubling centralization of market power driven by network effects and other economic forces would be to build a socialist movement. In particular, a socialized internet would see terms of service democratically decided upon by the users and workers who give the platform value, rather than by some corporation that presents you with a giant pillar of unreadable text which leads most of us to just click Accept. Transparent, publicly-decided terms would give us a reason to have some trust in the online platforms we spend so much time on, and actually prioritize human understanding and social solidarity instead of surreptitious data gathering to display ever more ugly ads for diapers and dick pills.

Here’s to socialist movement-building, and turning the page on Facebook. 


Rob Larson is a professor of economics at Tacoma Community College, author of Bit Tyrants and Capitalism vs. Freedom, and the in-house economist at Current Affairs.

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