Transfin.
HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. News
  2. Explained

The FTC Antitrust Lawsuit Against Facebook's Acquisitions of Instagram and WhatsApp, Explained

Editor, TRANSFIN.
Dec 10, 2020 1:59 PM 5 min read
Editorial

Nearly every US state is now suing Facebook.

The Federal Trade Commission (FTC) and a broad coalition of 48 states and districts have filed parallel lawsuits against the social media giant. They accuse it of anticompetitive behaviour - of pursuing a “buy or bury” strategy to squash small startups and choke competition.

The antitrust lawsuits, filed in the District of Columbia, seek a permanent injunction to break up Facebook’s business empire - specifically, to force it to unwind its acquisitions of Instagram and WhatsApp.

Facebook called the lawsuits “revisionist history”, adding that antitrust laws aren’t meant to punish “successful companies”. Instagram and WhatsApp, the company’s general counsel said, succeeded only after Facebook invested billions of dollars in growing the apps.

“Years after the FTC cleared our acquisitions, the government now wants a do-over,” the company tweeted.

Welcome, Instagram

In 2012, Mark Zuckerberg was discussing business strategies with his team.

“The basic plan,” he reportedly said, “would be to buy these companies and leave their products running while over time incorporating the social dynamics they’ve invented into our core products.”

The company in question was Instagram and the discussion was on how to deal with the emerging upstart. The photo-sharing platform was still two years old, with only 13 employees and no obvious path to profitability.

Zuckerberg wasn’t in two minds about Instagram’s threat to Facebook. “Instagram can hurt us,” he wrote in an email.

This followed Facebook offering to buy Instagram for $1bn. The latter could have rejected the offer. In fact, it probably wanted to. Instagram co-founder Kevin Systrom knew as well as Zuckerberg the disruptive potential of the platform. But he also knew that his was a small startup sans revenue while Facebook was a colossal giant with a ridiculously fat wallet.

Rejecting the offer might make Facebook’s founder go on “destroy mode”, as Systrom put it in a text message to one of Instagram’s early investors. He didn’t want to incur the “wrath of Mark”.

Thus, Instagram joined the Facebook family.

 

Welcome, WhatsApp

Two years later, a similar acquisition took place. This time, it was WhatsApp’s turn.

In 2014, it was an emerging messaging service that could potentially rival Facebook, but without revenue and with only 55 employees. Facebook paid $19bn for it.

And thus, WhatsApp too joined the Facebook family.

 

Legal Manoeuvring 

Facebook’s deals with Instagram and WhatsApp were required to pass regulatory scrutiny - and did so fairly quickly.

In fact, Facebook has acquired 80+ companies over the years, and they all passed government clearance when required.

FTC regulators opined that Facebook adding such early-stage startups to its cart wouldn’t expand its market share by much since both were small and weren’t generating profits.

Now the regulator must be wishing it could turn back the clock eight years and start over. Well, better late than never right?

 

Long March to Mayhem

Facebook has come a long way from being a college startup to an $800bn internet behemoth.

In its initial years, opinions were generally rosy. Users were amazed by its ability to grow rapidly and mint cultural trends. It was a defining feature of the zeitgeist. And few minded.

Over time, as the company grew, problems emerged. Initially, these were limited to concerns over user addiction and privacy violations. Seven years ago, Facebook was taken to task over its failure to protect user data - it settled the case - and then paid a $5bn fine to the FTC in 2019.

But in recent years, public and regulatory opinions on Facebook have sharply nosedived. The Menlo Park-based company has been accused of not doing enough to combat hate speech, conspiracy theories and fake news. It has been accused of engaging in widespread user data collection and converting it into a cash cow. It has been criticised for not checking ad fraud.

Regulators have been particularly irked by the company’s approach to competition, which can be characterised by a 2008 email by Zuckerberg in which he said “it is better to buy than compete”. And Facebook has raised many a brow over the sheer power it wields - not just within the tech industry but also when it comes to shaping people’s emotions and influencing election outcomes.

The increasing perception is that Facebook - and Big Tech in general - may be doing more harm than good.

 

Big Action against Big Tech

The US government’s action against Facebook’s “systematic strategy” of anticompetitive behaviour was a long time coming. The company knew this too: Zuckerberg had told employees in July that a confrontation with the government was an “existential” threat and that the company would “go for the mat” to fight any challenge to break it apart.

The challenge came - and it was multifaceted.

In summer 2019, the FTC and Justice Department initiated an exhaustive investigation into the business practices of the Big Four - Facebook, GoogleApple and Amazon.

In October this year, the US House antitrust subcommittee concluded a probe into Big Tech’s dominance that accused Facebook of having engineered a monopoly.

The executive has also taken a vociferously hardline stance in recent years. President Donald Trump recently threatened to veto the annual US defense authorisation bill unless Congress added a rider to abolish the law that protects technology companies like Facebook from liability over most content posted by users. He has repeatedly accused technology platforms of suppressing conservative views and becoming too big for the economy’s own good.

The backlash against Big Tech marks a rare instance of bipartisan agreement in a Washington that is currently bitterly divided along party lines. Both Democrats and Republicans are united in the push to curb these internet giants, which is why things are likely to remain hostile for Big Tech even during the incoming Joe Biden administration.

FYI: Big Tech companies are facing regulatory probes in many countries besides the US - including India, the UK and many EU countries. However, truly damming action can only come from the US government, simply because all these companies are headquartered in the US.

The lawsuits filed on Wednesday come mere weeks after the Justice Department sued “monopolistic” Google over similar antitrust complaints centered around the company’s search dominance.

Both these cases now constitute the most significant antitrust challenge in the tech industry since the 1997 lawsuit against Microsoft. That case ended with the US government settling with Microsoft, and it ended up permanently reshaping the tech landscape

The cases against Facebook and Google might end up doing the same.

P.S. Microsoft did manage to narrowly escape a breakup - here’s an interesting WSJ video on what transpired in 1997 and how it has affected Big Tech’s approach vs. Increasing government scrutiny.

FIN.

The cut-throat world of Business and Finance means that there is fresh News everyday. But don't worry, we got you. Subscribe to TRANSFIN. E-O-D and get commentaries like the one above straight to your inbox.