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US govt, states hit Facebook with antitrust lawsuit, propose hiving off Instagram, WhatsApp

“For almost a decade, Facebook has had monopoly power in the personal social networking market in the United States,” said a coalition of 48 states in its lawsuit against Facebook. In a significant development, the social media giant was hit by two lawsuits, one by the coalition and another by the US Federal Trade Commission, accusing it of anti-competitive business practices. Both lawsuits have asked for the reversal of Facebook’s acquisitions of WhatsApp and Instagram.

This is second major antitrust lawsuit filed against a social media giant in recent times. The Department of Justice (DoJ) has filed a lawsuit against Google, where it has proposed breaking up of the Big Tech company. The investigation into Facebook is a part of the larger antitrust scrutiny on Big Tech in the country. The legislative branch of the government has questioned Big Tech CEOs in high-profile hearings in recent months. Subsequently, the Judiciary Committee of the House of Representatives had recently called for a radical overhaul of antitrust law in the country.

The states’ lawsuit said that Facebook has maintained a monopoly over personal social networking market in the US. It said the company “illegally maintains that monopoly power by deploying a buy-or-bury strategy that thwarts competition and harms both users and advertisers”.

The lawsuit, headed by the Attorney General of New York Letitia James, noted that Facebook takes a “buy-or-bury” strategy to thwart competitors, harming both users and advertisers. It also accused the company of following up with exclusionary tactics to snuff competition, which has resulted in “chilled innovation”, “deterred investment” and “Forestalled competition”. Facebook users have nowhere else to go, giving the company significant control over how they engage with other users and what content they see, the suit remarked.

Facebook’s acquisitions and exclusionary tactics

Two of Facebook’s biggest acquisitions were WhatsApp and Instagram. The states’ lawsuit claimed that Facebook saw the two applications as a dire threat to its monopoly.

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“Facebook kept both services running after the acquisitions to fill the void, so they would not be replaced by another app with the potential to erode Facebook’s dominance” — States lawsuit

The FTC’s lawsuit, too, accused Facebook of using this strategy. “After identifying two significant competitive threats to its dominant position—Instagram and WhatsApp—Facebook moved to squelch those threats by buying the companies, reflecting CEO Mark Zuckerberg’s view, expressed in a 2008 email, that “it is better to buy than compete.” In a significant accusation, the states’ lawsuit speculated that Facebook bought WhatsApp for the gargantuan price of $19 billion only for the purpose of eliminating competition, and to maintain its monopoly. It added that Facebook also took active steps to use WhatsApp data to promote its core platform, despite “disavowing any such plans at the time of the acquisition”.

The lawsuits also noted how Facebook had acquired rivals and potential rivals to “eliminate, hobble, or keep [them] out of the hands of well-resourced firms that might enhance their competitive significance”. At times, the states’ lawsuit noted, Facebook has terminated the services of firms it had acquired, as it has successfully accomplished the goal of keeping it out of the reach of others. Such examples included Glancee (social discovery app) and EyeGroove (an AR-based music creation and sharing app). Facebook’s acquisition strategy results in “less competition, less innovation, and fewer choices for users and advertisers”.

The ‘bury’ tactic: Use of APIs to make throttle competition

The lawsuits state that for competitors that Facebook was unable to or not interested to acquire, Facebook “turned to an arsenal of exclusionary tactics”. It said that essentially Facebook wouldn’t mind taking a hit to its short-term profits to keep its monopoly intact.

Both lawsuits accused Facebook of enforcing conditions on third parties for accessing its application programming interfaces (API). APIs are software tools that enable communication between two different softwares or platforms. For many years, the FTC lawsuit says, Facebook made its key APIs available to third parties only on the condition that they refrain from providing the same core functions that Facebook offers. At the same time, the states’ lawsuit noted that Facebook had given no explanation on what it considered “core functionality” and how such policies would apply when Facebook itself expands its functionality to a new area.

In a similar vein, the states’ lawsuit says Facebook kept its platform open to third-party developers as long as they did not present a competitive threat to the company. Facebook closed its APIs on which those services relied, the suit said.

“This conduct — which is motivated by a desire to weaken and hinder potential competitive threats— harms competition and helps maintain Facebook’s monopoly in personal social networking, in at least two ways” — FTC lawsuit

“Facebook’s actions therefore disincentivised developers from creating new features that might compete with Facebook: adding new social features to an existing app might come at a significant cost of access to Facebook’s APIs” — States lawsuit

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Business model: Reliance, abuse of user data to make money

The states’ lawsuit — in an indelicate manner — summed up Facebook’s business model: “Selling Ads Based on Detailed User Data”. It said that advertisers pay billions to Facebook to reach the latter’s vast user base. It noted that Facebook was able to retain its users in spite of a degradation in quality of product features due to its monopoly power. In particular, it said, Facebook degraded the privacy protections and options it offered to users.

“Slowly but surely, Facebook became more aggressive about both collecting data on its users’ off-platform activity and pushing users to make more information public. […] and changed its privacy policy to allow for more collection and use of user data. With nearly every privacy policy update, Facebook steadily increased the richness of the user data it allowed itself to collect and retain, and expanded what it could do with the data” — States lawsuit [emphasis added]

Facebook, the states’ lawsuit noted, has vastly expanded its access to device information including location data, is collecting credit and debit card numbers and so on. “Facebook’s monopoly power is so strong that user engagement has not fallen even in the face of conduct that drives deep consumer dissatisfaction and mistrust of the company,” it said.

The monopoly that Facebook has built is also causing problems for advertisers on its platform, the states’ lawsuit says. It said that advertisers are being harmed by a lack of transparency about Facebook’s reporting metrics, and inability to audit Facebook’s reporting metrics, unreliable metrics due to Facebook error and the prevalence of fake accounts. “Without accurate information about performance, advertisers cannot accurately assess the value of their ad spend on Facebook’s properties,” it said.

Commenting on this accusation on Twitter, Jason Kint, chief executive officer of Digital Content Next, indicated that there were so many unknowns that Facebook “could be an Enron and we wouldn’t know it”. He was referring to the infamous Enron scandal from the turn of the century, where the company was found to be cooking its books, wildly misrepresenting its financial health.

The states’ lawsuit says that the lack of competitive constraints had led to the proliferation of misinformation and violent content. Though advertisers have expressed concerns over being associated with content, Facebook has still not given them ways to distance themselves from it. This was likely a reference to the recent boycott Facebook had faced in the wake of the Black Lives Movement (BLM) earlier this year.

Proposal to break-off WhatsApp, Instagram

The states’ lawsuit proposed that Facebook be restrained from making further acquisitions valued at more than $10 million without advance notification to the 48 states mentioned party to the suit. It sought the reversal of Facebook’s acquisition of WhatsApp and Instagram.

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The FTC lawsuit asked for “reconstruction” of businesses including WhatsApp, Instagram and possible more. Additionally, the FTC asked for any future mergers and acqusitions to require prior notice and approval.

Facebook hits back, calls lawsuits ‘revisionist history’

Meanwhile, Facebook came out with a rebuttal to both lawsuits, claiming that it competes “fiercely against many services across the world”. It attacked the FTC and state attorneys general for training their guns at WhatsApp and Instagram. “Both of these acquisitions were reviewed by relevant antitrust regulators at the time. The FTC conducted an in-depth ‘Second Request’ of the Instagram transaction in 2012 before voting unanimously to clear it […] Regulators correctly allowed these deals to move forward because they did not threaten competition,” said Jennifer Newstead, vice president and general counsel, Facebook.

Not mincing words, Facebook attacked the FTC for now claiming that it had gotten things wrong, and wants a “do-over”. “In addition to being revisionist history, this is simply not how the antitrust laws are supposed to work. No American antitrust enforcer has ever brought a case like this before, and for good reason,” the company said.

Facebook even admitted that the lawsuits have been filed at a time of great distrust in Big Tech companies, and specifically whether Facebook and others had done enough on harmful content and privacy. “We have called for new regulation to address some of them on an industry-wide basis. But none of these issues are antitrust concerns, and the FTC’s case would do nothing to address them,” it said. In fact, these challenges, it said, could be solved by updating the rules of the internet, perhaps referring to Section 230 of the US Communications Decency Act which shields internet intermediaries from liabilities.

Second major antitrust suit in the US

Big Tech companies have been under intense scrutiny in the US in the past few years. Recently, another tech giant Google was subject to an antitrust lawsuit for allegedly abusing and perpetuating its dominance in the search engine and advertising market. The lawsuit, filed by the Department of Justice and administrations of 11 states, had called it the “monopoly gatekeeper for the internet”.

The outcome of both the lawsuits will likely set global precedent on how individual countries can handle monopolistic tech companies. The European Union (EU) is set to unveil its Digital Services Act (DSA) and Digital Markets Act (DMA) package, which will have anti-competition provisions for Big Tech companies. Last month, the United Kingdom (UK) announced that it will set up a new body to regulate Big Tech companies. The proposed Digital Markets Unit (DMU) will be operational from April 2021.

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India has also trained its eyes on Google. The Competition Commission of India (CCI) had opened several investigations into the company, the latest being one about its Play Store and Google Pay. Other probes include one for Google’s abuse of the smartphone OS market, and another in the smart TV market.

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