Breaking Up Facebook: The feds want a do-over for acquisitions they previously approved

WSJ editorial.

"Facebook’s motto in its early days was to “move fast and break things.” That’s also one way to describe the Federal Trade Commission lawsuit against Facebook that was seconded this week by 46 state Attorneys General. That so many lawyers could come up with such a weak legal case is remarkable.

CEO Mark Zuckerberg doesn’t have many political friends these days in either party. He has been criticized for restricting speech on his platform both too much and too little. Facebook has helped to destroy the advertising market for newspapers, and the world might be better off without it.

But the purpose of U.S. antitrust law isn’t to remedy social or political problems. That’s essentially what the FTC on a 3-2 vote and the AGs are seeking with their lawsuits that asks courts to force Facebook to divest its Instagram (2012) and WhatsApp (2014) acquisitions.

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According to the FTC complaint, Mr. Zuckerberg sought to buy Instagram and WhatsApp to neutralize competition. Well, sure. “It is better to buy than compete,” Mr. Zuckerberg emailed in 2008. Any business must adapt as technology and consumer tastes change. Mr. Zuckerberg saw how smart phones increased photo sharing and private instant messaging.

It was less expensive and easier for Facebook to acquire apps than build copycats. But bigger companies buy upstarts all the time. Note also that Instagram and WhatsApp were complementary apps to Facebook, not direct competitors. Many people use parallel social-media platforms with distinct features such as TikTok, Twitter, Pinterest, Reddit and Snap.

The FTC speculates that WhatsApp and Instagram might have developed into strong competitors had Facebook not bought them. Perhaps so. But Instagram at the time of Facebook’s acquisition had 13 employees and no revenue. The FTC unanimously approved the $1 billion deal in 2012.

Most WhatsApp users in 2014 were (and still are) outside the U.S. Yet the European Commission cleared the $19 billion acquisition after finding no risk to competition in any potential market. Facebook’s Instant Messenger service, by the way, still boasts four times more U.S. users than WhatsApp.

Acquisitions don’t always succeed. See Verizon’s purchase of Yahoo and AOL or AT&T’s of DirecTV, which the telecom giant is now trying to auction off. Other tech giants were interested in Instagram and WhatsApp, and who knows if the apps would be as popular today under different ownership.

Facebook has spent billions developing and improving the apps. WhatsApp had charged a subscription fee before it was acquired, but Facebook made the app free worldwide and added video-calling and encryption. While Facebook kept Instagram free, it monetized the platform by adding ads.

The FTC says Facebook now has a digital monopoly in display ads, but this defines the market too narrowly. Companies use many platforms to advertise, including search. Those most harmed by Facebook (and other social media) are newspapers, including the Journal but especially local ones. Forcing Facebook to divest Instagram wouldn’t help them.

The FTC suit also says Facebook blocked app developers that use its platform from cooperating with competitors. But Facebook isn’t obligated by law to give developers free access to its platform, or provide its user data to help competitors. Developers have other means of reaching consumers including mobile app stores.

What about “network effects” that supposedly prevent startups with less user data from competing against Facebook? Well, even the FTC concedes “competitive threats to a dominant personal social networking provider can emerge, particularly during periods of technological or social transition and particularly if the newcomer is differentiated from the incumbent in a manner.” TikTok, Q.E.D.

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The complaint’s overriding weakness is that it mentions no concrete harm to consumers, which is the legal standard for antitrust violations. Facebook’s real offense seems to be that it is simply too big. But if that’s what politicians think, they can pass a law saying so.

This unprecedented after-the-fact antitrust review would set a new standard that could be used to break up any unpopular company. Government is creating the political risk that it can undo successful mergers, even those it approved, any time it wants. Don’t be surprised if the result is less venture investment for startups, less innovation—and less competition."