As the bell concluded the first bout, two heavyweights returned to their respective corners, one side bruised and battered, the other barely scuffled.
The score? Facebook 1 FTC 0.
In an attempt to rein in Big Tech, the U.S. Federal Trade Commission (FTC) had launched a major antitrust lawsuit against Facebook– only to have its case ruthlessly dismantled by the U.S. District Court for the District of Columbia.
The court’s ruling represented a big victory for Facebook (and tech companies in the US), but the points raised in it may have more far-reaching consequences in China, especially as regulatory bodies tighten their grip on tech companies here.
What was the FTC-Facebook lawsuit about?
FTC’s allegation of Facebook’s anti-competitive behaviour rested upon three key points:
- With a market share “in excess of 60%”, Facebook had monopolized personal social networking (PSN).
- It stifled competition by conditioning access to Facebook APIs– developers could not access them if their apps competed with Facebook Blue (or Messenger).
- It also prevented rivals from challenging its monopoly by acquiring Instagram and WhatsApp.
Watertight as these three arguments seemed, only the last claim stood up to the rigorous scrutiny.
Although the court accepted how the agency had defined a PSN service, as well as the players that it had identified to be in the PSN market, it ultimately dismissed this first point because FTC could not explain how it had derived Facebook’s market share.
“[T]he market at issue here is unusual in a number of ways, including that the products therein are not sold for a price, meaning that PSN services earn no direct revenue from users. The Court is thus unable to understand exactly what the agency’s “60%-plus” figure is even referring to, let alone able to infer the underlying facts that might substantiate it.”
Since the FTC also failed to identify any notable players in the PSN market (minus Facebook and Instagram), this seemingly arbitrary figure provided more questions than answers.
“[O]utside of Path, Myspace, and Friendster, all of which seem to be long defunct or quite small … [FTC] does not identify any other providers of PSN services. Yet, the FTC is apparently unwilling to allege that Facebook has ever (pre- or post-Instagram acquisition) had something like 85% or even 75% market share; instead, it hedges by offering only that that number is somewhere north of 60%. The question naturally arises: which firms make up the remaining 30-40%?”
While leaving them to question the substance behind FTC’s accusation of monopolization:
“The FTC’s Complaint says almost nothing concrete on the key question of how much Facebook actually had, and still has, in a properly defined antitrust product market. It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist.”
As for how Facebook had granted conditional access to its APIs, the court deemed the policy to be a simple matter of dollars-and-cents, rather than a serious issue of anti-competitiveness. Simply put, Facebook is running a business, not a charity– and it’s under no obligation to look out for its rivals.
“That is because “[m]onopolists are both expected and permitted to compete like any other firm,” and “[p]art of competing like everyone else is the ability to make decisions about with whom and on what terms one will deal.”
In fact, they argued that it would be counterproductive if Facebook had given its potential competitors full access to its existing features.
“[A]lready large and successful firms “might be deterred from investing, innovating, or expanding … with the knowledge [that] anything [they] creat[e] [they] could be forced to share,” while “smaller [competitors] might be [similarly] deterred, knowing [they] could just demand the right to piggyback on [their] larger rival.”
As such, the only contention that remained to be considered at the end was FTC’s allegation that Facebook had eliminated competition in its acquisition of Instagram and WhatsApp.
“The [Government] should be able to proceed against an acquisition whenever … the acquisition “is tending to destroy competition itself” via “means other than competition on the merits.”
What are the takeaways from the Facebook antitrust case?
The definition of a PSN service
Regardless of its outcome, the Facebook lawsuit was already a landmark proceeding because it was the first antitrust case involving a social media company. In deciding whether Facebook illegally monopolized the PSN market, this case provides the first hard-and-fast definition for a social networking service.
“Although the precise definition of a “Personal Social Networking Service” is disputed … it can be summarized here as one that enables users to virtually connect with others in their network and to digitally share their views and experiences by posting about them in a shared, virtual social space.”
More importantly, it also lists the companies that are not considered PSN service providers.
“First, “specialized social networking services” that “focus on professional … connections” (e.g., LinkedIn) are not substitutes because they are designed for and used primarily by professionals for sharing professional content ….”
“PSN services are [also] not reasonably interchangeable with services that allow for consuming and sharing video or audio content, such as YouTube, Spotify, Netflix … because users of such services mostly consume such content passively or share content created by others (rather than content they have created.”
That being said, we do question whether mobile messaging services are different from PSN services, considering how WeChat can facilitate social interactions with its various features.
“Mobile messaging services” cannot be substituted for PSN services because the former (i) lack a “shared social space” for interaction and (ii) do not employ a social graph to facilitate users’ findings and “friending” other users they may know.”
Calculating market share in the PSN market
Another insight that this case provides was on how the market share of players in the PSN market could (or more importantly, could not) be calculated. Overall revenue provides an unreliable estimate, considering how it is mainly generated from advertising services, which is independent of the PSN market.
The percentage of daily users or monthly users also falls short as a proxy measure– the PSN companies with the most number of users could also have the most number of bots or the most inactive users.
“Percent of “daily users [or] monthly users” of PSN services … are not much better, as they might significantly overstate or understate any one firm’s market share depending on the various proportions of users who have accounts on multiple services, not to mention how often users visit each service and for how long.”
Among all of these metrics, the share of the total time spent by users on PSN services seems to be the most promising, but it also opens up an entirely different can of worms.
“[S]ome of the features offered by Facebook [and] Instagram … are not, seemingly, part of those firms’ PSN-services offerings as defined by the FTC; time spent on those apps or websites, accordingly, is not necessarily time spent on a PSN service.”
In other words, if I spend an hour scrolling through a local bakery’s Facebook feed, without commenting or interacting with others, am I actually using a PSN service?
The debate could be coming to China
After Didi defied the Chinese government’s wishes by pushing forward with the original date of its IPO, regulatory authorities have increased their oversight of tech companies. Besides subjecting Didi to a cybersecurity review, they have also redoubled their efforts in antitrust, slapping fines on Tencent, Suning, and other tech giants for past investment deals.
While this Facebook antitrust lawsuit was based on US federal laws, it is likely to have global consequences, as it provides the world’s first (albeit half-formed) legal definition of the PSN market.
As such, the case may provide a possible reference point for tech authorities in China, especially as they step up their push on antitrust.
Emerging tech giants in other markets should probably also pay attention to this.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].