Facebook – Saved by the model

The government needs to do better.

• The dismissal of the two anti-trust cases against Facebook is not the end of the story as the US government lost for no other reason than that it did a very poor job of making its case.
• In December 2020, the FTC and 46 US states both filed complaints alleging antitrust behaviour to the detriment of consumers.
• The aim was to force a break-up of Facebook which could have seen the company being compelled to spin off WhatsApp and/or Instagram.
• Unfortunately for the government, the judge in both cases has dismissed both complaints on the grounds that both complaints were legally insufficient for them to continue.
• In effect, the judge is saying the government has failed to make its case or show sufficient evidence but crucially, the judge has left the door open for the FTC to have another go.
• The FTC now has 30 days in which to refile its complaint.
• The legal standard for market abuse of this nature across the Western world is usually that market dominance has to be established and then the plaintiff needs to establish that market dominance has been used to disadvantage consumers.
• At the heart of the failure is how the government has established Facebook’s dominance.
• In its complaint, the FTC failed to offer any metrics that demonstrated market dominance instead it relied on a vague assertion that Facebook obviously has 60%+ market share of social networking.
• I am pretty sure that the FTC’s allegation of dominance is correct but in a legal setting, this is insufficient which puts the FTC in a bind.
• This is because when users do not directly pay for the service, measuring the market becomes extremely difficult.
• I suspect that the correct way to measure this would be minutes of time spent in social networking overall and then look at how many of those minutes are spent engaged with a Facebook property.
• This too is fraught with difficulty as the definition of social networking is not clear.
• For example, is instant messaging social networking or is it just messaging?
• The case brought by the 46 US states also failed on similar grounds in that the plaintiffs had waited far too long to make their case.
• The response from the US government was to call for changes to the law that would presumably make it easier for regulators to go after companies that it “thinks” are abusing their markets.
• This would be a highly detrimental result as a law change based on this ruling would seem to allow regulators to sue companies for antitrust behaviour without having to properly make their case.
• The correct response from the government would have been to chastise the FTC and tell it to do its job properly.
• The problem with this case is that without monetary exchange, the real size of the social networking market and whether consumers are being harmed is very difficult to establish.
• I think that the key to making a better case lies in Facebook’s own statement following the ruling where it said that it “competes fairly every day to earn people’s time and attention”.
• This is how the FTC needs to make its case although it will be more difficult on the second attempt given it will be under a greater degree of scrutiny.
• This is a net positive for Facebook as the worst-case scenario of a forced break-up has now been kicked down the road and its defense will be emboldened by the apparent incompetence of its opposition.
• I am still not in favour of the risk-reward of the FAANG names (see here) which is why I don’t own them but Facebook has been defying this trend with a steady march to its $1tn valuation.