The Federal Trade Commission vs Facebook - Summary of the Suit

This is a change of pace from the usual content of this blog, but then I’ve only been updating very sporadically, so perhaps a change of pace is needed. Below, I summarize the FTC complaint against Facebook, citing the relevant paragraphs so you can get more detail as needed. This was a useful exercise in helping me understand the case; I hope it also helps you understand.

Overview & Background

The greatest competitive threats to Facebook “come not from ‘Facebook clones’ but from differentiated services during periods of transition” (8). In buying Instagram and WhatsApp, Mark Zuckerberg and Facebook saw themselves as “buying time” to dominate the mobile market before anyone else could compete (14). In addition to buying rivals Instagram and WhatsApp, Facebook behaves anticompetitively by restricting third party API use to those who don’t compete with Facebook (23).

Facebook chose to monetize by using proprietary algorithms to analyze user data and target advertisements to those users (43) and earns all of its revenue this way (50). Called social advertising, this type of advertising is distinct because it targets users via personal data (47), because it promotes engagement with the advertising, and because it facilitates users sharing the advertising with personal connections (48).

‘Personal social networking services’ are a distinct service in that they: are built on top of a social graph that maps connections between users; allow users to share things through this graph, and allow platforms to determine how things are shared through the graph; and allow users to find and connect with new people, growing their social graph (52). The relevant geographic market is the United States, as social networking services that are popular in other countries are not interchangeable if they are not also popular in the US (56). They are also not interchangeable with highly specialized social networking sites (LinkedIn, Strava), with video or audio posting sites (YouTube, Spotify, Netflix) (58), or mobile messaging services, which do not utilize a social graph or create a shared social space (60).

Facebook has been dominant, controlling at least 60% of the social networking market (64),since at least 2011 and claims its purpose is to allow people to form “real connections” (62). Instagram at the time of acquisition had similar goals and used similar methods. Facebook’s dominant position is due in part to direct network effects and switching costs (that is, loss of content, connections and contextual information about that content and connections) (65).

Because of strong network effects, a dominant platform is most vulnerable at moments of transition, when changes in technology or consumer behavior lead to possibilities it is not yet optimized for. In 2010-2014 the proliferation of smartphones made Facebook’s monopoly position incredibly vulnerable (70). Facebook addressed this vulnerability not by competing on their merits but by acquiring Instagram, WhatsApp, and imposing anticompetitive conditions on their API (71). This behavior is part of longstanding anticompetitive culture at Facebook (72). Facebook has tried and failed to buy other rivals (Twitter, Snapchat, redacted) and has internally bemoaned that they would now have to compete. Facebook also acquired a user surveillance company, Onavo, which allowed them to track which potential competitors were building audiences (74).

Facebook acquired Instagram to Neutralize a Competitor

Facebook struggled to capture the mobile market as it emerged; one reason for this was it was optimized for desktop rather than mobile use (79). Instagram, on the other hand, launched in 2010 and grew quickly, attracting 10 million users in under a year (81). Facebook initially tried to compete by building its own mobile photo app, Snap, but development was slow and senior executives complained they were getting beaten by Instagram (83). By early 2012 Zuckerberg and other senior Facebook executives and shareholders were discussing whether or not to acquire Instagram or another mobile photo startup (88). (Note: there are many similar emails cited in the complaint. I found the one linked in (87) particularly notable as it argues explicitly for keeping switching costs high for users.)

In response to internal questions, Zuckerberg laid out the reasoning for the acquisition: they needed to buy Instagram and keep it running to fend off any additional competitors, giving Facebook time to build up similar capabilities (91). On April 9th, 2012, Facebook acquired Instagram for $1 billion (95). Within two weeks they’d begun the process of discontinuing their own mobile app (98). They also took action to reduce the impact of Instagram on Facebook (102) with the VP of Product explaining that they didn’t want users to get in the habit of checking multiple feeds (103).

The complaint summarizes the harms to users as including, arguing that Instagram and other competitors would have offered to users “the presence of an additional locus of competitive decision-making and innovation; a check on Facebook Blue’s treatment of and level of service offered to users; an alternative provider of personal social networking for users untethered from Facebook’s control; and a spur for Facebook to compete on the merits in response.” (105)

Facebook Acquired WhatsApp to Neutralize a Competitor

Beginning around 2010, “over the top” (OTT) messaging, a free and more fully-featured alternative to SMS, began to grow (107). As OTT apps began expanding into social networking-like services, Facebook came to view them as a threat (109). The Director of Product Management wrote, “[T]his is the biggest threat to our product that I’ve ever seen in my 5 years here at Facebook; it’s bigger than G+, and we’re all terrified” (110). Zuckerberg wrote, shortly after acquiring Instagram in April 2012, “I now feel like we’re ahead in photos but falling increasingly behind in messages.” (112) He wanted to use a similar strategy of acquisition to handle their biggest competitor in the OTT space, WhatsApp (120).

WhatsApp launched in 2009 and by February 2014 had grown to 450 million monthly active users (113). In fall 2011 Facebook launched Messenger to compete with WhatsApp (115) but they were far behind (116). By 2013 Whatsapp was clearly considered Facebook’s biggest threat (118). In November 2012 Facebook tried to acquire Whatsapp and failed; on Feb 19 2014, they acquired Whatsapp for 19 billion (121). A Facebook executive described the purchases of Whatsapp and Instagram as a “land grab” in the new mobile market (123).

Since purchasing WhatsApp Facebook has kept it from launching features that make it more like a social networking site (126). Among the many harms to users deprived of a competiting service, it’s worth noting that WhatsApp focused strongly on user privacy and would have offered a distinctly valuable alternative to Facebook for many users (127).

Facebook Maintained and Enforced Anticompetitive Conditions for Platform Access

Facebook launched “Facebook Platform” in 2007, a service which allowed developers to build apps and tools that interoperate with Facebook Blue. As Zuckerberg put it in 2009, they wanted to be “the defacto open graph/identity database that everyone uses in all their applications.” (129) In 2010 FB opened up several APIs to third party developers, including the “Find Friends API” (130), which let developers connect users with their FB friends, and the Open Graph API (131), which let third party apps use Facebook’s like button in their apps, with in-app likes shared on Facebook, attracting users to the app. Open Graph in particular was extremely popular among developers (132). The move profited Facebook by attracting new users and advertisers (133), by promoting Facebook around the internet, and by increasing their access to social data (134). The success of the platform also gave them immense power over third-party developers (135) Facebook used this power to prevent developers from competing with Facebook or promoting competitors (136).

On July 27 2011, largely in response to the launch of Google+ (140), Facebook introduced a new policy for Facebook which said they could not “integrate, link to, promote, distribute, or redirect to any app on any other competing social platform” (139). In September 2012 they added a policy preventing developers from exporting user data to competing social networks (142). In Jan 2013 they introduced a policy demanding that apps share data back to Facebook and that they not replicate FB core functionality or export data to a service that replicates FB core functionality (143). These moves provoked internal dissent (144, 145). In May 2014 FB launched “Platform 3.0” which was more restrictive generally, and cut off access to the Friends API for all apps (146). Internally, fear of competition seemed to be a motivation for the change (147).

Facebook enforced these rules against a number of apps with social networking features, including Path (153) and Circle (154), as well as Twitter’s Vine (155), as well as large numbers of apps which offered mobile messaging services (156). In December 2018, they did remove the “core functionality” language from their restrictions, but this was done the day before a member of the UK Parliament published a series of documents highlighting FB’s anticompetitive policies (148). There is no reason to believe they won’t reinstate the restrictions once scrutiny passes (149).

Conclusion

Facebook’s anticompetitve behavior has deprived users of the benefits of competition, including “additional innovation (such as the development and introduction of new attractive features, functionalities, and business models to attract and retain users); quality improvements (such as improved features, functionalities, integrity measures, and user experiences to attract and retain users); and/or consumer choice (such as enabling users to select a personal social networking provider that more closely suits their preferences, including, but not limited to, preferences regarding the amount and nature of advertising, and the availability, quality, and variety of data protection privacy options for users, including, but not limited to, options regarding data gathering and data usage practices)” (163).

Facebook’s behavior has also harmed advertisers, depriving them of the benefits of competition, including “additional users to advertise to […]; lower advertising prices […]; additional innovation […]; quality improvements (as additional advertising competition would incentivize quality improvement, such as with respect to transparency, integrity, authentication of ad views, customer service, accuracy in reporting performance and other metrics, and brand safety measures such as sensitivity to neighboring content); and/or choice” (167).

The FTC is asking for:

• the divestiture and reconstruction of Instagram and/or WhatsApp, as well as any other assets or businesses sufficient to restore competition
• prior notice & approval for future mergers and acquisitions
• that Facebook be enjoined from anticompetitive restrictions on API access
• that Facebook be enjoined from anticompetitive behavior generally
• that Facebook be required to file periodic compliance reports
• and “any other equitable relief necessary to restore competition and remedy the harm to competition caused by Facebook’s anticompetitive conduct described above”