Is the relief sought by the FTC in its case against Facebook the right way to go? In principle, yes. However, the FTC might win the battle but lose the war if it doesn’t undertake other initiatives that support the long-term goal.
Facebook should be forced to divest of Instagram and WhatsApp, according to the antitrust lawsuit filed in December by the Federal Trade Commission. In the lawsuit, the FTC alleges that, among other actions, Facebook acquired these two Apps in order to preserve its social networking monopoly.
Can such a divestiture be feasible, efficient, and ultimately beneficial to consumers? Yes. First, the divestiture seems feasible, mostly because from the end consumers’ perspective, Facebook, Instagram, and WhatsApp are distinct services that potentially can run smoothly on their own. Second, while the separation process may be difficult due to the complex back-end structure that involves technologies and key personnel, the social cost of finding feasible technical solutions for this separation is not insurmountable and may well be below its benefits. Finally, given the success of Instagram and WhatsApp (at least on the user side) and the market power currently enjoyed by Facebook on the advertiser side of the market, separating Instagram and WhatsApp from Facebook has the potential to improve competition in a way that benefits advertisers and, ultimately, the end-users as well.
Yet, looking at the three issues above to assess a possible breakup would be reductive. This is because even the equitable solution of an individual action must also consider broader implications within the wider architecture of rules that govern markets. This is not a formalistic stance. Rule enforcement has broader consequences that go well beyond the immediate effects of the adopted remedies, affecting long-term competition and welfare. Appreciating the systemic implications requires first framing divestitures as part of a broader enforcement strategy (as envisaged by the enforcement agencies and as perceived by the other stakeholders) and draw implications on firms’ dynamic incentives in light of this strategy.
We propose three alternatives:
First, divestitures could be considered as a “post-mortem” merger control action. Indeed, our retrospective study of digital mergers for the UK’s Competition and Markets Authority (CMA) shows that competition authorities did not exert their power as they should have, and that a chance to make digital markets more competitive was missed. In that research, our colleagues and we concluded that in the Facebook-Instagram merger more scrutiny was warranted, and blocking the merger would have been a wiser decision. It should be said that these conclusions have been reached with the benefit of hindsight. At the time of the acquisition, Instagram was basically a photo-sharing application that only later evolved into a social media outlet, possibly as a result of the merger.
We believe that even if we were to regret enforcement decisions, an ex-post merger control would be wrong not on grounds of fairness, but due to the dynamic response it would trigger. The anticompetitive effects of the Instagram and WhatsApp acquisitions—or even more so, the pro-competitive potential of the divestiture—became evident precisely because these products are vivid “success stories” and because unscrambling the eggs does not currently seem impossible. If tech giants understand that an ex-post divestiture is an available option even a decade after the merger has gone through a regular ex-ante scrutiny, they will pursue their anticompetitive objectives differently: they will either kill the potential rival or integrate it in a way that the undoing becomes impossible or too costly. Although Facebook might have tried this, it did not succeed, as the current FTC suit suggests. Thus, the threat of posthumous action may increase the social harm of the very same anticompetitive conducts it is meant to address.
The second scenario considers the Facebook break-up as part of an antitrust enforcement strategy tackling unilateral conduct: a broader scheme whereby dominant firms systematically acquire potential future rivals. Indeed, this is the approach adopted by the FTC, at least formally. We shall note that to implement this strategy, authorities should not rely on merger reviews that only look at specific mergers and acquisitions but rather go after the larger scheme linking them all. In our CMA study we showed that during the decade in which these two acquisitions occurred, Facebook acquired 71 firms. So, in this case, we wonder why so much emphasis is placed on Instagram and WhatsApp (two specific mergers that by themselves do not amount to a “scheme”).
Similar to the first scenario, breaking up Facebook could trigger an anticompetitive dynamic that might be worse than what it seeks to cure: firms might just develop ways to mask their anticompetitive conduct to hinder a potential break-up. For example, there is some evidence that rivals such as Google, which acquired 168 firms in the same decade, had internal processes in place to limit their exposure to antitrust probes to find “smoking guns.”
The third scenario considers the FTC action as a first step in a process of regulation by litigation. This is not novel. Competition among telcos was largely introduced thanks to the AT&T mandated break-up, followed by a wide and necessary regulatory intervention that spread across the world. Without the latter, the AT&T break-up would not have been as effective. A similar regulatory approach is likely necessary for Instagram and/or WhatsApp divestitures to be effective. While several regulatory initiatives have been proposed in various jurisdictions, it will take quite some time before a clear and effective plan is developed and implemented on how to introduce competition in these markets.
“If Tech giants understand that an ex-post divestiture is an available option even a decade after the merger has gone through a regular ex-ante scrutiny, they will pursue their anticompetitive objectives differently: they will either kill the potential rival or integrate it in a way that the undoing becomes impossible or too costly.”
In the telecom industry, the regulators aimed to preserve the productive efficiency of a natural monopoly while simultaneously introducing some form of competition. The solution—which, by the way, appears obvious today but it was not at the time—was to split the supply chain so that the network remained a monopoly and the downstream market was opened to competition. To make this paradigm work, network access had to be regulated and competition protected through ex-ante rules, along with hundreds of ex-post antitrust enforcement decisions at the national and supranational levels.
The same conceptual paradigm does not work in the digital sector. The “monopoly” condition we observe is mostly due to network externalities that are substantially different from the network economies of scale that characterized the telecom industry. The fact that they occur on the demand side of the market, rather than on the supply side, make them a different animal. Indeed, if monopoly power stems from supply-side economies, the solution is to share the fixed asset among competitors; if it stems from demand-side economies, the solution should be to share customers or what they bring to the table.
This is doable—e.g., interoperability—but less straightforward. Moreover, in most cases, economies occur on both sides of the market, making the situation even more complex. The result is that competition for the market, rather than in the market, is the only really feasible type of competition in many cases. Although imperfect, it can still generate substantial benefits if the incumbent is (and is aware of being) constantly under the threat of new and potential rivals.
In conclusion, is the relief sought by the FTC the right way to go? In principle, yes. However, the FTC might win the battle but lose the war, unless it undertakes other initiatives that support the long-term goal.
First, and foremost, break-ups should be a remedy of last resort. Rather, ex-ante merger enforcement should be revamped in a way that helps address the challenges posed by tech industry mergers. Our review of decision processes in the UK—especially concerning the Facebook-Instagram acquisition—vividly shows that our current legal standards and review practices are unfit for Big Tech, as the UK authorities allowed mergers that should have been blocked or at least remedied.
A much tougher stance is needed more than ever when addressing the tech industry. Unfortunately, the recent controversial decision of the EU Commission to allow Google’s acquisition of Fitbit is not encouraging. It demonstrates that competition authorities neither fully appreciate that it is competition for the market rather than competition in the market that is critical, nor have they sufficiently explored dynamic theories of harm. Perhaps, to make this possible, the standard of proof, at least for these theories of harm, should be lowered to reflect the inherent difficulty of proving these effects. Competition authority should also have more powers to gather the evidence they need to assess the likely effects of a merger.
Moreover, competition authorities can and should enforce unilateral conduct prohibitions without limiting their investigations to those cases that are the most obvious. Indeed, only a consistent enforcement action guarantees that future anticompetitive strategies are deterred.
Finally, a new regulatory paradigm must be defined. Several initiatives have been already discussed around the world. For instance, in the European Union, the proposed Digital Market Act introduces “black” and “grey” lists of prohibited practices and obligations for gatekeepers platforms in areas where antitrust has been perceived not to be effective. This is the right direction but it needs fine-tuning. A part (admittedly shrinking) of the antitrust community may resist this, considering it to be a revelation of competition law failure. It is not: regulation and competition law need to work alongside each other to foster and preserve competition across a number of industries, not just tech.
Disclaimer: Paolo Buccirossi advised several companies active in digital markets as well as competition authorities and public bodies on competition policy issues.
Tomaso Duso has served as consultant for several public bodies , such as various DGs of the European Commission, the UK Competition Commission and Competition and Markets Authority, the Dutch Authority for Consumers and Markets, the OECD, and the European Bank for Reconstruction and Development on competition policy issues.
Emilio Calvano has served as a consultant for Facebook (2018) and the UK Competition and Markets Authority (2019) and received research funding from Microsoft (2013) and Google (2020).
