The Newly Assertive FTC Faces Its First Big Test—and It Doesn’t Look Promising

Aurelien Portuese August 23, 2021
August 23, 2021

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FTC Chair Lina Khan has filed a suit against Facebook seeking to unwind the social network’s past acquisitions of WhatsApp and Instagram. This is the first lawsuit for the new chair, and it is a test for her populist agenda: Her management of the FTC has appeared to be problematic so far. So does this lawsuit.

While the antitrust complaint alleging that Facebook has “monopoly power” is Khan’s first as chair, it is actually more of a legal mulligan for the FTC, which is renewing a prior complaint after a judge dismissed it for failing to define the relevant market for Facebook. So, unless it provides a convincing demonstration of Facebook’s monopoly power, the new complaint will be rendered boneless. And the argument Khan and her staff have come up with is that social networks such as TikTok, Twitter, LinkedIn, and many others do not compete with Facebook. They say the relevant market for antitrust purposes is the “personal social networking” market. In other words, the FTC believes Facebook is used for communication with family and close friends while other networks are designed to communicate with the wider public (“followers”).

That makes little sense. Because most Internet networks are two-sided markets (with advertisers on one side and users on the other), and because most are free to users, the relevant market from an antitrust perspective is the advertising market: Users enjoy Facebook for free, which then monetizes the consumers’ attention in the time they spend on the platform.

When considering the advertising market, the FTC complaint seems to erroneously suggest that the level of competition in the “personal social networking” market will determine the level of competition in the advertising market. It thus inaccurately assumes advertisers cannot reach end users through alternative platforms such as LinkedIn, Twitter, Snapchat, TikTok, Reddit, Clubhouse, and Telegram—much less alternative media such as TV, radio, print, etc.) Indeed, the FTC claims in the 10th paragraph of its complaint that:

Many personal social networking providers monetize their platforms through the sale of advertising; thus, more competition in personal social networking is also likely to mean more competition in the provision of advertising. By monopolizing personal social networking, Facebook thereby also deprives advertisers of the benefits of competition, such as lower advertising prices and increased choice, quality, and innovation related to advertising.

This undocumented assertion suggests that if Facebook would degrade the quality of its advertising services for advertisers, then advertisers will have insufficient alternatives to reach consumers. This analysis is misguided, as the current competitive constraints on the digital platform advertising market (should we narrowly define it as such) are quite strong given the numerous channels and platforms available to advertisers (e.g., digital news sites, search, email marketing services, etc.). Thus, this inaccurate assertion undermines the very basis of the FTC’s antitrust complaint. It is precisely because Facebook competes intensely for advertising dollars that it also competes intensely for “eyeballs,” knowing that if users spend more of their time on other platforms like Twitter or TikTok that their advertising revenues will fall.

On the users’ side, the FTC defines the “personal social networking” market as different from related social media platforms to conclude that, with the exception of Snapchat, they exert no competitive constraint on Facebook. Such arbitrary definition of this market bluntly ignores market realities and consumer habits. Contrary to what the FTC argues in its complaint, with an average of 338 “friends,” Facebook users hardly consider their “Facebook friends” as family and close friends. Indeed, features such as Facebook Pages, public groups, and of course followers on Instagram, prove that Facebook users interact with individuals they don’t know. Ignoring that users can, interchangeably, post information either on Facebook, Twitter, or LinkedIn—or post a video on Facebook, TikTok, or YouTube—leads the FTC to narrowly delineate the relevant market to make Facebook look like the monopolist it wants.

In defining the market Facebook allegedly monopolizes, the FTC complaint rightly distinguishes personal social networking from mobile messaging services. But it advances this distinction by referring to WhatsApp as being in a different market than Facebook! In other words, the FTC wants simultaneously to include WhatsApp in the market of social networks to demonstrate Facebook’s intention to acquire a rival while also excluding WhatsApp from the social networking market to demonstrate Facebook’s monopoly in the “personal social networking” space. Unfortunately, the FTC’s vague complaint wants to have its cake and eat it too: Facebook acquired the rival WhatsApp without competing with WhatsApp (and in acquiring WhatsApp eliminating the fee, making it a free service).

Equally, the FTC complaint considers TikTok as “not an acceptable substitute for personal social networking services.” To exclude TikTok from Facebook’s rivals appears so detached from consumer habits and the competitive rivalry currently at play that such assertion is likely to raise the judge’s eyebrows.

Meanwhile, the procompetitive effects of Facebook’s acquisitions of Instagram and WhatsApp seem not to be of interest to the FTC. Antitrust cases typically must balance out procompetitive and anticompetitive effects of the practices under scrutiny. Not the FTC complaint: Without further explanation or scrutiny, the complaint considers that “Facebook cannot justify this substantial harm to competition with claimed efficiencies, procompetitive benefits, or business justifications that could not be achieved through other means.” Making WhatsApp free and vastly extending the size of its network made consumers better off. Moreover, it generated significant efficiencies as software firms with high fixed costs, and close to zero marginal costs benefit enormously from economies of scale and scope.

Again, given the need to respect the due process, the judge may be more inclined to adequately assess the defendant’s arguments to avoid unintended consequences of sanctioning efficient conduct beneficial to consumers. Therefore, this renewed complaint by the FTC to unwind Facebook’s mergers with WhatsApp and with Instagram may not be any more promising than the first complaint: It is problematic to argue that Facebook monopolizes a market that regulators fail to identify convincingly. Moreover, the FTC complaint uses Facebook’s “enormous advertising profits” as evidence of anticompetitive practices. The FTC indeed argues in paragraph 207 of its complaint that:

Facebook has enjoyed enormous profits for an extended period of time, suggesting both that it has monopoly power and that its personal social networking rivals are not able to overcome entry barriers and challenge its dominance. Since 2011, Facebook has sustained high profits and market capitalization.

This argument is fundamentally flawed for at least two main reasons. First, Facebook’s profitability does not directly derive from its position as a social media platform but as a provider of advertising services to advertisers. Should these services become less attractive, inferior, or uncompetitive, advertisers may easily switch to alternate providers of digital advertising services or more traditional advertising means. To infer from profits an abusive market position on a specifically created market not only errs in the sources of the profits but also on the merits and instability of these profits. The FTC also seems to ignore the fact that profits are a reflection of costs and revenue. Because marginal costs go down with more users, Facebook (which has 2.9 billion) is being punished simply for having many users find its free service of value. And its revenue, as noted above, comes from the competitive advertising market.

Second, the inference that Facebook’s profits since 2011 illustrate anticompetitive conduct in the “personal social networking” market cannot constitute compelling evidence. Created in 2003, Facebook generated profits for the first time in 2009. Therefore, to look at Facebook’s profits from 2011 onwards is misleading.

Indeed, the FTC only focuses on the platform’ years of profits as evidence of anticompetitive conduct: The complaint does not acknowledge that these profit patterns—of long periods of losses potentially followed by large profits that make up for them thanks to network effects—are common to many digital platforms or capital-intensive companies.

Consequently, the FTC’s flawed assertion is replicable for any innovative company enjoying some market power on the user side without considering the fierce competition taking place on the supply side. To illustrate, it would be tantamount to arguing that after years of losses, Uber’s profits resulted from the anticompetitive practices against consumers without considering that Uber constantly has to attract and retain drivers who can choose competitors. Otherwise, the digital app would instantly lose share.

The FTC should not ignore the years of losses and the economics of digital platforms where the competition takes place on both sides of the platforms. Of course, if the product is successful, profits may unfold in subsequent years—but this is the result of competition, not a lack of it. Moreover, high profits in and of themselves are not a sign of inadequate competition. They can be, and in this case are, a sign of a highly efficient firm.

Finally, the FTC’s case faces an obstacle in the fact that the evidentiary burden that must be met to unwind consummated mergers is, justifiably, a very high standard. “Not only would such a challenge be difficult for the enforcers legally, it should be difficult,” writes attorney Steven J. Cernak. Indeed, the ability of an agency to unwind the mergers it previously approved frustrates fundamental rights at the core of our legal system. The government and regulators owe businesses and individuals a degree of legal certainty. Approval of mergers gives market actors legitimate expectations that the government will not subsequently intrude into the merged firm’s property rights. The whole rationale of our merger laws, which provide for ex-ante merger controls, is to avoid the impossibility of “unscrambling the eggs” with ex-post merger challenges.

De facto, a non-retroactivity principle prevents antitrust agencies from unwinding consummated mergers: Given the FTC complaint’s weaknesses, it is unlikely that even an adventurous judge will frustrate the legitimate expectations market actors ought to have from regulators. The benefits for consumers would be illusory, but the legal uncertainty that would ensue is certain.