The twin antitrust actions brought against Facebook last week sent a clear message to American businesses: You can seek profit, or you can seek influence, but you had better not try to secure too much of both.
The key contention of the lawsuits brought by the Federal Trade Commission and, separately, by a bipartisan coalition of nearly all state attorneys general, is that Facebook has abused its alleged monopoly position to the detriment of its users. This means the 196 million Americans (among 2.7 billion worldwide) who regularly use its eponymous social media platform – for free. Also the 112 million active monthly users in the United States (of some 1 billion worldwide) who use Instagram – for free. And the 2 billion worldwide clients of the WhatsApp messaging service (a comparatively trivial 68 million in this country, many of whom partake sparingly) who use it – guess what? – for free.
The argument that these users, who enjoy free access to Facebook’s platforms, are somehow economically injured by them is specious on its face. The economic theory of antitrust law is that a monopolist can abuse its position to charge customers more than the fair market value of its product. Facebook’s ownership of these services has effectively reduced the fair market value of user access to zero. If Facebook started charging even a small monthly fee, say the $5 to $15 that a video streaming service typically costs, its user base would contract immediately and substantially. So it has chosen a different business model.
Different, but familiar. Facebook assembles a large audience and then sells access to that audience – whose members participate knowingly and willingly – to advertisers who want to reach them. It is the same mass media business model that gave rise to daily newspapers, broadcast radio and commercial television. It has advantages, but carries no guarantee of success. The New York Times survived the rise of broadcast media; the Brooklyn Eagle and the New York Herald Tribune did not. Radio survived the rise of television by switching most of its content from drama and comedy to music, traffic reports and news. In the digital era, MySpace held a dominant position before Facebook arrived, while Yahoo and other services faltered against Google (itself the target of a similarly misguided antitrust action).
Media enterprises exist primarily to make money. Government exists to exercise power. Those who enter government do so to wield that power for their preferred purposes. Until recently, there was some level of symbiosis between media and government. Broadcasters could not even turn on their transmitters without first acquiring a government license to use the airwaves. Governments here and abroad acted against “pirate” stations as aggressively as they could, restricting broadcast rights to those who played by their rules. Newspapers sought to enlarge their audiences by getting the most interesting stories before their competitors got them. If you are in government and you want your news to land on the front page of The New York Times, you don’t hold a press conference and give it to everyone. You call a friendly Times reporter and offer an exclusive.
Politicians, however, found the old media far more controllable than the new purveyors of user-generated and user-shared, algorithmically distributed content. An “equal time” rule still provides political candidates with most-favored-nation treatment when it comes to buying advertising on broadcast outlets used by their opponents. The Federal Communications Commission formally abandoned its broadcast “fairness doctrine” about matters of public controversy several decades ago, to the chagrin of public figures who felt put upon by talk radio hosts. But that doctrine would have been vulnerable to First Amendment attacks anyway, especially in an era when what one side sees as fairness is seen by the other as giving a platform to “knuckleheads” or “fake news.”
The latest lawsuits seek to force Facebook to unwind its 2012 acquisition of then-small Instagram, which it bought for $1 billion, and its purchase two years later of WhatsApp for $19 billion. Neither company was forced to sell to Facebook. Those deals can best be described as the product of mutual fears: Facebook did not want to risk seeing the audience it sells leak away to other platforms and pastimes, while the founders of Instagram and WhatsApp did not want to risk Facebook or another deep-pocketed tech giant simply launching and promoting rival products that would overshadow theirs. Facebook was also willing and able to pay a premium price. If you can pull it off, starting a company and selling it to Mark Zuckerberg for $1 billion or so is not a bad business strategy. Some would call it capitalism.
Both the Instagram and WhatsApp deals passed antitrust scrutiny at the time. What changed? Nothing, other than the fact that both platforms have prospered under Facebook’s management. And that Facebook itself is drawing a lot more heat these days – across the political spectrum – for its perceived sins.
Of course, Facebook still faces competitive threats to its audience and businesses every day. The Instagram acquisition did not stop Twitter, and then TikTok, from attracting massive followings. When we all locked ourselves in our home this year, many of us turned to Slack (now the target of a pending takeover by Salesforce) and Zoom, not WhatsApp or Facebook Messenger – or even Google Meet. Every hour we spend watching Disney+ or one of our many other video streaming options is an hour we are not spending on social media (assuming we aren’t multitasking). Facebook is light years away from having a monopoly on our screen time, and it has no visible prospect of securing one.
This is not to say Facebook’s business practices are above suspicion. Its handling of user data is fair game for scrutiny, to see whether it is complying with privacy laws and its own policies and commitments to users. Its treatment of developers and business partners could implicate fair trade laws. There are ample grounds to take a close look at Facebook, and other digital platforms with user-supplied content, on potential defamation, copyright and harassment concerns. There can be legal or policy grounds for government action on any of these bases, and surely others. But that is not what the recent antitrust suits are about.
They are about sending a message. That message is that if you are a private business, those holding the levers of government can make your life at least as difficult as you make theirs. No business is ever too big for the government to come after them. In that sense, the antitrust suits have already succeeded in part, regardless of their outcome.
Posted by Larry M. Elkin, CPA, CFP®
Facebook CEO Mark Zuckerberg in 2018. Photo by Anthony Quintano, licensed under CC BY.
The twin antitrust actions brought against Facebook last week sent a clear message to American businesses: You can seek profit, or you can seek influence, but you had better not try to secure too much of both.
The key contention of the lawsuits brought by the Federal Trade Commission and, separately, by a bipartisan coalition of nearly all state attorneys general, is that Facebook has abused its alleged monopoly position to the detriment of its users. This means the 196 million Americans (among 2.7 billion worldwide) who regularly use its eponymous social media platform – for free. Also the 112 million active monthly users in the United States (of some 1 billion worldwide) who use Instagram – for free. And the 2 billion worldwide clients of the WhatsApp messaging service (a comparatively trivial 68 million in this country, many of whom partake sparingly) who use it – guess what? – for free.
The argument that these users, who enjoy free access to Facebook’s platforms, are somehow economically injured by them is specious on its face. The economic theory of antitrust law is that a monopolist can abuse its position to charge customers more than the fair market value of its product. Facebook’s ownership of these services has effectively reduced the fair market value of user access to zero. If Facebook started charging even a small monthly fee, say the $5 to $15 that a video streaming service typically costs, its user base would contract immediately and substantially. So it has chosen a different business model.
Different, but familiar. Facebook assembles a large audience and then sells access to that audience – whose members participate knowingly and willingly – to advertisers who want to reach them. It is the same mass media business model that gave rise to daily newspapers, broadcast radio and commercial television. It has advantages, but carries no guarantee of success. The New York Times survived the rise of broadcast media; the Brooklyn Eagle and the New York Herald Tribune did not. Radio survived the rise of television by switching most of its content from drama and comedy to music, traffic reports and news. In the digital era, MySpace held a dominant position before Facebook arrived, while Yahoo and other services faltered against Google (itself the target of a similarly misguided antitrust action).
Media enterprises exist primarily to make money. Government exists to exercise power. Those who enter government do so to wield that power for their preferred purposes. Until recently, there was some level of symbiosis between media and government. Broadcasters could not even turn on their transmitters without first acquiring a government license to use the airwaves. Governments here and abroad acted against “pirate” stations as aggressively as they could, restricting broadcast rights to those who played by their rules. Newspapers sought to enlarge their audiences by getting the most interesting stories before their competitors got them. If you are in government and you want your news to land on the front page of The New York Times, you don’t hold a press conference and give it to everyone. You call a friendly Times reporter and offer an exclusive.
Politicians, however, found the old media far more controllable than the new purveyors of user-generated and user-shared, algorithmically distributed content. An “equal time” rule still provides political candidates with most-favored-nation treatment when it comes to buying advertising on broadcast outlets used by their opponents. The Federal Communications Commission formally abandoned its broadcast “fairness doctrine” about matters of public controversy several decades ago, to the chagrin of public figures who felt put upon by talk radio hosts. But that doctrine would have been vulnerable to First Amendment attacks anyway, especially in an era when what one side sees as fairness is seen by the other as giving a platform to “knuckleheads” or “fake news.”
The latest lawsuits seek to force Facebook to unwind its 2012 acquisition of then-small Instagram, which it bought for $1 billion, and its purchase two years later of WhatsApp for $19 billion. Neither company was forced to sell to Facebook. Those deals can best be described as the product of mutual fears: Facebook did not want to risk seeing the audience it sells leak away to other platforms and pastimes, while the founders of Instagram and WhatsApp did not want to risk Facebook or another deep-pocketed tech giant simply launching and promoting rival products that would overshadow theirs. Facebook was also willing and able to pay a premium price. If you can pull it off, starting a company and selling it to Mark Zuckerberg for $1 billion or so is not a bad business strategy. Some would call it capitalism.
Both the Instagram and WhatsApp deals passed antitrust scrutiny at the time. What changed? Nothing, other than the fact that both platforms have prospered under Facebook’s management. And that Facebook itself is drawing a lot more heat these days – across the political spectrum – for its perceived sins.
Of course, Facebook still faces competitive threats to its audience and businesses every day. The Instagram acquisition did not stop Twitter, and then TikTok, from attracting massive followings. When we all locked ourselves in our home this year, many of us turned to Slack (now the target of a pending takeover by Salesforce) and Zoom, not WhatsApp or Facebook Messenger – or even Google Meet. Every hour we spend watching Disney+ or one of our many other video streaming options is an hour we are not spending on social media (assuming we aren’t multitasking). Facebook is light years away from having a monopoly on our screen time, and it has no visible prospect of securing one.
This is not to say Facebook’s business practices are above suspicion. Its handling of user data is fair game for scrutiny, to see whether it is complying with privacy laws and its own policies and commitments to users. Its treatment of developers and business partners could implicate fair trade laws. There are ample grounds to take a close look at Facebook, and other digital platforms with user-supplied content, on potential defamation, copyright and harassment concerns. There can be legal or policy grounds for government action on any of these bases, and surely others. But that is not what the recent antitrust suits are about.
They are about sending a message. That message is that if you are a private business, those holding the levers of government can make your life at least as difficult as you make theirs. No business is ever too big for the government to come after them. In that sense, the antitrust suits have already succeeded in part, regardless of their outcome.
Related posts: