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Economy

Facebook has only itself to blame for drastic remedy

MARK ZUCKERBERG always knew.

In 2012, when Instagram was two years old, with 13 employees and no obvious path to profitability, Zuckerberg knew that the fast-growing photo app was a potential threat to Facebook, Inc.’s social media dominance. “Instagram can hurt us,” he wrote in an e-mail. In an internal discussion about whether to buy Instagram — and other startups that might one day pose a threat to Facebook’s social media monopoly — he added, “The basic plan 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.”

Kevin Systrom, Instagram’s co-founder, knew something, too. He knew that angering Zuckerberg might cause the “wrath of Mark” to come down on his still-fragile company and cause Facebook’s founder to go into “destroy mode,” as he put it in a text message to one of Instagram’s early investors. Yes, Instagram might one day become a significant competitor to Facebook — but it was also possible that Facebook would clone Instagram’s technology and put the startup out of business. So in April 2012, when Zuckerberg offered to pay $1 billion for the company, Systrom and the Instagram board said “yes.”

But when it sought to get the deal approved by the Federal Trade Commission (FTC)  in the US and the Office of Fair Trading in the UK, Facebook argued with a straight face that there was plenty of competition from other photo apps like Camera Awesome. And the two government agencies were also convinced that because Instagram had no revenue, a merger with Facebook wouldn’t meaningfully add to its market share. The two regulators took only four months to approve the deal. But of course they didn’t know what Zuckerberg and Systrom knew.

On Wednesday afternoon, the FTC and 48 attorneys general filed dual antitrust suits designed to undo the merger of Facebook and Instagram — as well as Facebook’s takeover of WhatsApp, another potential rival that it bought in 2014 for a staggering $19 billion. (WhatsApp also had no revenue and 55 employees at the time Facebook bought it.)

This is a radical proposition — the US government hasn’t contemplated breaking up a company since the Justice Department sued Microsoft in 1998. But I’ve long believed that there is simply no other way to curb Facebook’s immense monopoly power.

In the attorneys general complaint, the plaintiffs contend that Facebook employs a “buy-or-bury strategy that thwarts competition and harms both users and advertisers.” One would be hard pressed to disagree. Venture capitalists are so fearful of Facebook’s ruthless tactics they simply won’t fund startups that Zuckerberg might view as competition, no matter how insignificant. Thus is innovation stifled, as is competition itself.

As a result, the plaintiffs contend, social media consumers don’t have legitimate choices. If they don’t like Facebook’s privacy policies, or if they want fewer ads, or are offended by Facebook’s unwillingness to face squarely the amount of disinformation on its platform, what are their options? Move to Instagram? Or WhatsApp? They are still in Facebook’s universe, which can still use their data to make oodles of money.

Zuckerberg has apologized a dozen times or more for some Facebook missteps and promised to do better. Nothing much changes. Facebook agreed to a settlement with the FTC in 2012 over what the agency called “privacy-related violations” — and then had to pay a $5-billion fine seven years later for violating the terms of that settlement. One reason to break up Facebook is that less onerous remedies have simply failed to make a difference. Facebook has proved again and again that it doesn’t take government mandates seriously.

As the economist Hal Singer put it in a tweet soon after the complaint was filed, “There is no injunctive or behavioral cure that can remedy this mess. Facebook’s anticompetitive conduct defies traditional (regulatory) approaches.”

The second reason to break up Facebook is that it is the only way to create competition in the social media business — and to create it instantly. Instagram now has more than 1 billion monthly active users. WhatsApp has more than 1.6 billion. What’s more, before Facebook bought them, the two companies had much different approaches to matters such as privacy and even profitability.

For instance, WhatsApp’s Chief Executive Officer Jan Koum, left Facebook in 2018 after a “clash over data,” as the Washington Post put it at the time. Koum had long kept the data of WhatsApp users private, but Zuckerberg had decided the time had come for Facebook to start monetizing it. A WhatsApp that was divorced from Facebook might well establish itself as an alternative to Facebook’s data practices. Indeed, that’s what it was before it was acquired in 2014. The same could be true of Instagram. They wouldn’t compete with Facebook on price, obviously, but on all the other things social media users care about.

It’s no secret that government antitrust cases are difficult to win in court, where judges have heavily favored consolidation in recent decades. Facebook will argue — as it already has — that it won government approval of the deals fair and square. “Years after the FTC cleared our acquisitions, the government now wants a do-over,” the company said in a tweet.

But reducing Facebook’s power is one of the few issues that Republicans and Democrats agree on, and as my colleague Tae Kim notes, David Cicilline, the chair of the House antitrust subcommittee, would be well served to craft a bill that would make it easier to curb the power of the big technology companies, starting with Facebook.

As for the antitrust suits, breaking up Facebook isn’t just the right solution, it’s the only solution.

BLOOMBERG OPINION

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