In the past few years, Social media has become an inseparable organ of the society which not only helps people reach out to one another regardless of geographical barriers but also has become a crucial driver of public opinion.
The lion’s share in this trend is undoubtedly enjoyed by the Social Media Corporation floated in the hostel room of Harvard: The “Facebook” Inc, which is now facing legal trouble due to the USA regulator filing a suit under the Antitrust Laws (the Competition Laws of USA).
The Federal Trade Commission (FTC) is the Authority that monitors and regulates Competition laws, which is similar to the Indian regulator: Competition Commission of India (CCI).46 States in US have filed suits against Facebook alleging Anti-competitive practices by acquiring entities involved in the similar business thereby eliminating competition and driving out small players from the market. The suit seeks to demerge or separate “Instagram” and “WhatsApp” the two most profitable subsidiaries of Facebook.
In the month of December 2020, the New York Attorney General held a press conference briefing the public at large about the lawsuit instituted against Facebook stating that:
- The Acquisitions of a number of Companies by Facebook virtually neutralize the small businesses and reduce the choice for consumers.
- Acquisition of Instagram was at 1 billion USD when it wasn’t even earning a cent, in 2012. WhatsApp was acquired for 19 billion USD in 2014, the value being much larger than what the corporate valuers of the Company had computed.
- In order to put an end to the monopoly, we hereby lodge a complaint to the Authority for spin off (separation) of WhatsApp and Instagram from Facebook Inc”.
Competition Laws in USA:
Sherman Antitrust Act, 1890 and the Federal Trade Commission Act, 1914 (FTC, Act 1914) largely governs the Anti competitive arrangements in the US.
Secondly there is a legislation called the Hart-Scott-Rodino Antitrust Improvements Act, 1976 which gives a monetary threshold of 94 Million USD for reporting Mergers. So only the mergers having purchase cost above the Limit need to be reported to a Committee formed under this Act. The submissions are subject to scrutiny by the Federal Trade Commission as well.
Analysis of applicable provisions:
As per Sec 2 of Sherman Antitrust Act, 1890, “ Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof; shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court”.
Similarly, Sec 5 of FTC Act, 1914 states that any unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.
For establishing Monopoly as per US laws, it is necessary to satisfy dual requirements:
- Dominant share in the relevant market.
- Willful maintenance of the Dominant position and not acquiring the same due to a superior product or service.
The relevant market being of Social media Companies, Facebook enjoys a huge 60% share in the market. This satisfies the 1st test above.
The 2nd test might be checked through analysis of the patterns of Acquisitions of several Companies by Facebook over the past 10 years. Instagram and WhatsApp are the examples more debated about But, apart from these, Facebook has acquired nearly 85 companies like ConnectU (social networking), Friendfeed (consolidates updates from social networking sites), Atlas Solutions (Online advertising), Snaptu, Gowalla (location tracker), Jibbogo (carrying out voice translations) and so on. These were relatively smaller entities involved in more or less the same line of business and could have been probable Competitors of Facebook. There have been News Reports of Facebook trying to acquire Snapchat as well, which didn’t materialize.
The widely discussed Antitrust case of Microsoft Inc also had a similar premise. The Regulator alleged that Microsoft partnered with the search engine Internet Explorer and offered the same for free, which became a threat to its Competitor, ‘Netscape Navigator’, and resulted into a loss of market share. Microsoft was held guilty in the case and was directed to share its interfaces with other companies. Similarly, Facebook also has acquired a large number of such companies involved in the same line of business thereby neutralizing small businesses and indulging in anti-competitive practices.
There is a thin line of difference between getting preferred content to enrich the user experience on the basis of declared information and activities on the platform and even across other platforms and Breach of Privacy of data of the users.
Certain defenses put forth by Facebook could be:
- That the growth is totally organic in nature and the monopoly is not due to specific measures taken to curb competition but it is the superior marketing and unique features, which give it an edge over others in the markets.
- The 2nd test as mentioned above, contains this proviso that proving the growth to be totally due to superior services shall be a valid exception.
- Higher price for acquisition is not paid on the basis of current state of affairs but the price is determined on the basis of future viability and growth prospects of the business. So the premium paid over valuations should not be examined with an investigative lens. We can agree to disagree on the growth and revenue forecasts, market share and valuations.
- Another fact is that the deals have been executed almost 6–8 years ago. Out of the total 85 deals some are even 10 years old. Every deal is subject to scrutiny by the Regulators. The deals are to be scrutinized on the basis of Monopolistic tendencies. Further the FTC Act, under Sec 6(a), (b) and (c) empowers the Commission to monitor and investigate into the compliances w.r.t. Antitrust decrees. Are the US regulators caught napping???
- European Union has issued a Report analyzing the Facebook – WhatsApp deal and clearly stated that they are not anti competitive with regards to the structure. Facebook messenger is connected to Facebook account and WhatsApp is connected to mobile nu mber. Similarly, introduction of advertising through WhatsApp will not cause any appreciable impact on competition.
It will be both important and interesting to see how the acquisitions are interpreted from the Competition law angle by the authorities. WhatsApp and Instagram are undoubtedly the Star Kids of Facebook and their demerger would be a big blow to the revenues and stocks of Facebook.
 Bare Text of Sherman Antitrust Act, 1890: https://www.ourdocuments.gov/doc.php?flash=false&doc=51&page=transcript
-  Bare Text of FTC,1914 : https://www.ftc.gov/sites/default/files/documents/statutes/federal-trade-commission-act/ftc_act_incorporatingus_safe_web_act.pdf
- 3 Market share data: https://www.businessofapps.com/data/facebook-statistics/#:~:text=US%20Facebook%20user%20demographics&text=The%20percentage%20has%20even%20increased,when%20it%20stood%20at%2068%25
- 4 Microsoft Judgment : https://www.justice.gov/atr/us-v-microsoft-courts-findings-fact