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Facebook faces most serious breakup threat yet from lawsuits

Facebook faces most serious breakup threat yet from lawsuits
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The twin lawsuits filed against Facebook this week by the government and more than 40 attorneys general are the most serious effort to break the social media giant up to date.

The cases, which differ slightly, focus on the allegation that Facebook made acquisitions in an effort to decrease competition in the social network marketplace and ultimately worsened the quality of options available to consumers.

The Federal Trade Commission and 48 state and territory attorneys general propose a solution to that issue: divestiture.

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Specifically, they ask for judges to spin off the photo-sharing app Instagram and the messenger service Whatsapp, which were acquired in 2012 and 2014 respectively.

The complaints use internal communications to build a narrative around the intent behind the purchases.

Very early on in its suit, the FTC highlights a 2008 email from CEO Mark ZuckerbergMark Elliot ZuckerbergTexas governor signs ban on outside help for election administrators Hillicon Valley: NATO members agree to new cyber defense policy | YouTube banning politics, elections in masthead ads | 50 groups urge Biden to fill FCC position to reinstate net neutrality rules Pink Floyd's Roger Waters: 'No f---ing way' Zuckerberg can use our song for ad MORE saying that “it is better to buy than compete.”

Similar correspondences are brought up relating to both major purchases. The states’ lawsuit highlights that before acquiring Instagram, Zuckerberg responded yes to an executive asking if a goal of purchasing the app was to “neutralize a potential competitor.”

It also reveals several communications before the purchase of WhatsApp showing executives worried about messaging apps challenging Facebook.

“We are facing a huge threat with messaging competitors,” the company’s director of product management at the time emailed in 2012. “[T]his is the biggest threat to our product that I’ve ever seen in my 5 years here at Facebook; it’s bigger than G+, and we’re all terrified.”

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Beyond just that the acquisitions were motivated by quashing potential rivals, the plaintiffs will have to prove there is consumer harm stemming from the acquisitions.

The states’ complaint argues that Facebook’s conduct has deprived users of innovations, quality improvements and consumer choice. It drills down on quality of privacy protections as something that users have lost.

“The underlying theory of robust antitrust litigation is that the incumbents would be providing a better product and/or a better product at a lower price if they were facing really competitive forces in a functioning market,” David Dinielli, a former special counsel with the Justice Department’s antitrust division and a senior adviser at the Omidyar Network, explained to The Hill. “And that's exactly the theory of these cases as well.”

The FTC’s suit makes the case that Facebook’s monopolization of the market has also hurt advertisers by leaving them with higher prices and lower quality options for where to run their ads. However, some onlookers have questioned whether that loss can be quantified.

“The reality is advertising costs have fallen something like 40 percent in the past few years,” Asheesh Agarwal, a former assistant director at the agency’s office of policy planning and current deputy general counsel at the libertarian-leaning think tank TechFreedom, said. “I guess you could say ‘well gee they would have fallen even further if not for these acquisitions,’ but that's a very hard case to make and then you're left with this kind of nebulous theory.”

Facebook’s main response to the lawsuits so far is that regulators had the chance to block the acquisitions at the time, but chose not to.

“This is revisionist history," Facebook's general counsel Jennifer Newstead said in a statement. "The most important fact in this case, which the Commission does not mention in its 53-page complaint, is that it cleared these acquisitions years ago. The government now wants a do-over, sending a chilling warning to American business that no sale is ever final."

However, there is a distinction between choosing not to challenge a merger and approving of it.

In fact, the FTC’s letter to Facebook about Instagram at the time explicitly says that not continuing the investigation “is not to be construed as a determination that a violation may not have occurred.”

The agency has split up consummated hospital mergers before, proving there is at least some precedent.

Another argument that Facebook may make is that the market that the complaint defines is too narrow and that the company faces plenty of competition now from platforms like TikTok.

The complaints define the relevant market as being social networks dependent on digital advertising, excluding “online video or audio consumption-focused services such as YouTube, Spotify, Netflix, and Hulu.”

“I think there is a tension between how they talk about the fact that … Instagram and WhatsApp were adjacent products that could step into Facebook's space, but then don't really talk about the fact that there's dozens of those products right now,” Neil Chilson, former FTC chief technologist and senior research fellow at the Charles Koch Institute, said. “They'll have to present a compelling argument for why TikTok and LinkedIn aren't in the same sort of position.”

If the plaintiffs do prove that Facebook’s acquisitions violated antitrust law and that divestiture is the best method for relief, spinning off Instagram and WhatsApp will still pose a challenge.

The platforms have been integrated into Facebook’s larger framework and share back end resources like computer servers.

Zuckerberg has also planned to further integrate Instagram and WhatsApp by merging their chat functions with Facebook’s. However, that may not be a problem given that the states’ case proposes platform interoperability as an avenue for relief.

Jennifer Gyrgiel, an assistant professor at Syracuse University’s Newhouse School who specializes in social media, stressed that unwinding being hard doesn’t make it impossible.

“It's just going to take time and planning,” they told The Hill. “And then there are companies that can acquire pieces of Facebook.”

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Both apps have massive user bases, and while they have benefited greatly from Facebook’s help there’s no obvious reason to think they would flounder if left alone.

The last time that the government mandated a breakup of a company at the scale of Facebook’s was in 1984 when the Bell System was split into seven independent telecom providers.

For Matt Stoller, director of research at the anti-monopoly organization the American Economic Liberties Project, the two lawsuits filed this week, along with the DOJ’s suit against Google, could constitute the most important antitrust case since the Bell breakup.

“First of all, these are very important companies that are extremely powerful, so trying to address their monopolistic behavior will have significant impacts on our media and communication markets,” he said. “Second is that it could restructure antitrust law … and then third, it signifies a broader political shift in how Americans relate to corporate power.”