Almost a decade ago, the Federal Trade Commission raised no objections as Facebook spent billions of dollars to swoop up the trendy photo-sharing app Instagram and the messaging service WhatsApp.
Now the same agency is demanding that Facebook sell both off companies, calling the earlier deals a prime example of the social network’s “buy or bury” strategy for crushing competition.
What happened in between is a shift in attitudes by antitrust regulators on what constitutes a dangerous monopoly — a development that poses risks not just to Facebook but to other dominant companies across industries including tech, pharmaceuticals and finance.
This week’s antitrust suits against Facebook by the FTC and dozens of state attorneys general came a month after the Justice Department went to court to block Visa from buying a financial data startup called Plaid — on the grounds that, much like Facebook, the credit card giant is trying to neutralize a rising competitor by buying it. The FTC has also challenged two other recent proposed deals, one involving pharmaceuticals and the other DNA-sequencing technology, that it alleged were intended to cut off competition that didn’t yet exist.
That “legal revolution,” as one antitrust expert called it, has yet to be tested in court. But people following the issue say the Facebook suits could pave the way for more of these kinds of challenges.
“The legal and political environment around antitrust in Big Tech is super different now” from 2012, said John Newman, who spent three years as an antitrust prosecutor at the Justice Department. Back then, “people were out there making the claim that when a market is free there can’t be harm to consumers and antitrust doesn’t apply.”
“It’s just a complete 180,” said Newman, now an antitrust professor at the University of Miami School of Law.
First though, the FTC and states will have to convince a federal judge that Instagram and WhatsApp would have been as successful as they are today even if Facebook had never bought them, said Kristen Limarzi, who spent 11 years as a DOJ antitrust lawyer. Facebook is already disputing that argument.
“The FTC’s case has to be built on more than just regret,” said Limarzi, who joined the law firm Gibson Dunn last year. “The merger has to be evaluated based on the facts in 2012 when it happened.”
Even some lawmakers who support the FTC’s Facebook suit expressed bemusement about the agency’s 180-degree shift in its thinking toward the WhatsApp and Instagram deals.
“I am glad to see that our antitrust enforcers are finally taking the threats posed by Big Tech seriously,” Sen. Mike Lee (R-Utah) said in a statement Wednesday about what he called the FTC’s “belated” lawsuit. He added, “At the same time, the FTC previously cleared both the Instagram and WhatsApp acquisitions, and I hesitate to congratulate it now for trying to clean up its own mess.”
The commission has shown signs earlier this year that it is taking a new look at tech industry transactions that it had originally deemed too small to warrant its scrutiny. In February, the FTC announced that it had issued investigative subpoenas to Facebook, Amazon, Apple, Microsoft and Google’s parent Alphabet, demanding information on 10 years’ worth of mergers, as part of a study into acquisitions of startups.
It’s still unclear how much President-elect Joe Biden’s administration will embrace the changing zeitgeist. The FTC’s two Democrats, Commissioners Rohit Chopra and Rebecca Kelly Slaughter, both voted for the Facebook suit this week along with the agency’s Republican chair, Joseph Simons, while the other two Republican commissioners voted against it. Simons is expected to step down in the next month, leaving the FTC with a 2-2 partisan split.
Instagram and WhatsApp’s parallel universe
Facebook disputes the reasoning behind the FTC’s case, maintaining that its stewardship has caused Instagram and WhatsApp to thrive by investing significant funds and other resources into both.
When Facebook bought Instagram for $1 billion in 2012, the smaller company was a promising startup with only 30 million users to Facebook’s 1 billion. WhatsApp, which Facebook bought in 2014 in a deal valued at nearly $21 billion, was a messaging app with a big following outside the U.S. By then Facebook had gone public and was looking to expand into new areas.
“I think it's really worth remembering that when we bought Instagram and WhatsApp, they were really small little companies,” Facebook Chief Operating Officer Sheryl Sandberg said in a Friday interview on the Tamron Hall Show. “Instagram had 13 employees, 13. WhatsApp had 55 employees. And so we bought them, we bought them a long time ago, we invested, we grew them, and now they're really big.”
To counter that argument, the FTC and states could try to show that some other company would have bought or invested in Instagram and WhatsApp if the social network hadn’t. The FTC’s complaint cites emails among CEO Mark Zuckerberg and other Facebook executives expressing concerns about Apple, Google or Twitter using Instagram to gain “a foothold” in the social media market.
Menesh Patel, an acting professor at the University of California-Davis School of Law, said such a strategy would let the FTC and states avoid having to show that either app would have become as successful on its own.
The plaintiffs’ case would still involve talking about a hypothetical world that doesn’t exist, noted Patel, who specializes in antitrust. “But I’m sure any companies that were seeking to acquire WhatsApp and Instagram could provide testimony.”
Facebook has also argued that the FTC’s suit represents an unfair “do-over” for an agency that previously looked at and cleared the two mergers.
“In addition to being revisionist history, this is simply not how the antitrust laws are supposed to work,” Jennifer Newstead, the company’s general counsel, said in a blog post Wednesday. “No American antitrust enforcer has ever brought a case like this before, and for good reason.”
That’s not entirely accurate, said Shaoul Sussman, a legal fellow for the Institute for Local Self-Reliance, an advocacy group that promotes small business.
“It’s unusual in the context of the last 20 years,” Sussman said of the FTC’s Facebook case. “It’s not within the wheelhouse of run-of-the-mill FTC actions, but that doesn’t mean it’s unprecedented or breaking new ground.”
Breaking up is hard to do
The current way that federal regulators address mergers, in which companies must notify the FTC and DOJ about deals above a certain size, has existed only since 1976, noted Sussman, an associate at the law firm Pearl Cohen in New York. Before that, regulators reviewed mergers and, if necessary, unwound them after the fact, he said.
The FTC is always careful to leave open the possibility of challenging deals later, even if it rarely does so. In its 2012 letter closing its investigation into the Instagram purchase, the FTC said it had found no violation “at this time.”
“This action is not to be construed as a determination that a violation may not have occurred,” the FTC said. “The Commission reserves the right to take such further action as the public interest may require.”
It’s also not unheard of for the two U.S. antitrust agencies to challenge mergers they had initially OK’d, Patel said. In a paper set to be published in the Wisconsin Law Review, Patel found that the FTC or DOJ have challenged four mergers they had previously cleared since 2001. The most well-known case involves a 2004 FTC challenge of an Illinois hospital merger that had taken place four years earlier.
If the FTC and states succeed in persuading the court that the Instagram and WhatsApp deals are illegal, the hardest question might be what to do about them. Both complaints ask for Facebook to be forced to sell off the two services. That’s not as easy as one might think, said Jay Himes, an antitrust partner at the firm Labaton.
From 2014 to 2018, Himes served as a court-appointed monitor to help unwind the merger of Bazaarvoice and PowerReviews, the two leading software companies used by brands and retailers for online ratings and reviews. The companies merged in 2012 but the antitrust agencies weren’t notified because the deal was so small. The Justice Department opened an investigation afterward and sued to undo the deal in 2013.
“It is not as easy to do a divestiture as I think maybe academics and some judges think,” said Himes, who also helped monitor Microsoft’s compliance with the 2001 settlement that resolved its antitrust prosecution. “They think of this as a clean mechanism for restoring competition. Theoretically it is, but operationalizing it can be more challenging.”
Facebook has moved to increase the integration between its main platform and Instagram and WhatsApp, rolling out features this year to let users communicate between Facebook Messenger and the other two services. That could make them even harder to separate.
In the FTC’s case against the Illinois hospitals — Evanston Northwestern Healthcare Corp.'s acquisition of Highland Park Hospital — the agency ultimately decided not to unwind the deal because of the difficulties it would entail. Instead, it agreed to a settlement in which each hospital would set up a separate team to negotiate contracts. That resolution didn’t end up working well and the FTC has never used it again.
In his view, Himes said, a technology company can be more difficult to untangle than a hospital, which has only physical assets and personnel.
“The brands are still there,” Himes said of Instagram and WhatsApp, “but you don’t know if the people are still there. That would influence how easy or difficult it is to spin off one of these. In part, the success of the company depends on the people, the strategic thinkers and marketers.”
UC Davis’ Patel said that even if a break-up is possible, that ultimately might not end up being the best way to resolve the cases.
“Even if it’s feasible, a breakup may not be ideal because it may not be a remedy that addresses the competitive harm,” Patel said. If the FTC and states show the Instagram and WhatsApp deals were “bad because of the impairment to consumer privacy … it’s unclear to me whether the breakup would be the thing that solves the problem.”
But Sussman quoted two Supreme Court cases, including a unanimous one from 1990, that called divestitures or break-ups “the preferred remedy for an illegal merger.” And in major antitrust suits against monopolies from Standard Oil and American Tobacco in 1911 to the Justice Department case that dissolved the old AT&T in 1984, breakups were the solution, Sussman said.
“All of these dusty, musty cases are going to be pulled out sooner or later,” he said.
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