The Antitrust Case Against Facebook Is Bad Economic Policy

The Federal Trade Commission and 47 states are suing Facebook for allegedly squelching competition by acquiring startups, and seeking divestiture of Instagram and WhatsApp. The suits are without merit and bad economic policy.

Facebook offers users a tool to create online bulletin boards where individuals, affinity groups and businesses can communicate personal news, collaborate, market products and generally network.

Network effects

It is great for organizing family gatherings and class reunions and has evolved into the dominant bulletin board platform because of the network effect.

Like the telephone system, the value of most social media services grows with the number of active users on the same platform. Unlike cellphone services, social media apps generally lack interoperability — the ability to send a message from Facebook to Twitter.

Membership is free — Facebook can’t harm consumers by raising prices as is usually understood in antitrust law. Its business model is driven by online ad sales, where its 23% market share trails. Online ad rates have fallen 40% since 2010.

In the broader social media, messaging and moderation space, Facebook has plenty of competition — Snap, Slack, LinkedIn, Reddit, Discord and TikTok. The latter grew to 800 million users in just four years.

Data mining

The most fundamental problems with Facebook and Google, which faces a Justice Department and two state suits, Apple, which is fending off a class-action suit, and Twitter, which recently was fined by the European Union, are how they may mine and use personal data and treat businesses who sell products and advertise on their platforms.

Amazon, for example, is notorious for harvesting data about businesses, which often must sell on its platform to survive, and creating competing products. It coaxes small firms into acquisition talks, only to obtain their proprietary information and mount strategies to drive them out of business.

Facebook is in reputational hell for enabling Russian meddling in the 2016 election, but such grievances would not be resolved by spinning off Instagram and WhatsApp.

The FTC approved Facebook’s acquisition of Instagram in 2012, when it was only a photo and video sharing service and WhatsApp in 2014, when it was only a text messaging and voice over the internet service. Since then, Instagram, WhatsApp and Facebook have integrated back end functions — servers, software and networking — making the three difficult and costly to disentangle.

Facebook’s popularity among young people is declining, and its user base appears to have plateaued and may soon decline. Perceived anticonservative biases at Facebook and Twitter are driving right-leaning users to Parler, but that trend defies network effects and may not hold up if President Donald Trump recedes in prominence.

Central to future

Facebook is increasingly reliant on Instagram for revenue growth. Although WhatsApp currently contributes little to the bottom line, both apps, in combination, are central to Facebook’s future.

Facebook has been building shopping and payment features into Instagram and customer-business interactions capabilities into WhatsApp. Linked together through Facebook those could be amalgamated into a powerful competitor for Amazon and Walmart.

That’s very pro-competitive and could provide the American answer, so far lacking, to China’s, which permits all those functions and more. Add Libra or a similar invention, which would create hard-currency-backed digital money and payments system, and Facebook could offer an American answer to China’s Alipay and other fintech competitors.

Congress, the broader Washington establishment, and the general public have good reason to dislike Mark Zuckerberg and other internet magnates, However, divesting Instagram and WeChat could ultimately destroy Facebook, much as spinning off regional telephone companies marked the beginning of the end of the original AT&T.

EU competition authorities, instead, are focusing on compelling these companies to clearly explain to users how they intend to exploit their personal data and obtain their consent. Refrain from mining data and squeezing smaller businesses on their platforms and treat all products on an equal footing with their own offerings. And be more proactive about taking down harmful content — and keeping it out in the first place — when identified by authorities.

Americans have a long history of disliking monopolies going back to the Boston Tea Party — the cargo the patriots threw overboard belonged to the East India Trading Company. But acting on visceral impulses will dampen, not increase competition, could hand the future of fintech to China and make Americans poorer in the process.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1