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The Case Against Facebook

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The Case Against Facebook

The Case Against Facebook

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JACOB GOLDSTEIN, HOST:

Last week, the federal government and attorneys general - or ah-ttorneys (ph) general, if you prefer - from 46 states, and from Guam and Washington, D.C., filed what may be the biggest antitrust case of the 21st century and one of the biggest antitrust cases in all of American history.

AMANDA ARONCZYK, HOST:

They have accused Facebook of using its power and money to squash competition, in large part by buying out its competitors. So since 2012, Facebook has bought dozens of companies, and the antitrust case focuses on two big acquisitions in particular - Instagram and WhatsApp.

GOLDSTEIN: According to the complaint filed by the government, Facebook's acquisitions of Instagram and WhatsApp were illegal. And as a result, the government argues Facebook should be forced to sell off the companies, companies - Facebook points out, for its part - that they have spent tens of billions of dollars to acquire and build.

ARONCZYK: Now, if you have been listening to PLANET MONEY for a while, the news of this case might not be a surprise.

GOLDSTEIN: Almost two years ago, at the beginning of 2019, we did a whole series about the history of antitrust law in America, about the part of the law that deals with monopoly and market power and competition among big businesses. It had been decades since the government had used antitrust law in a big way, but it was a moment when a few big tech companies were clearly getting bigger and bigger and people were starting to talk about it again, starting to ask if the government was going to go back and dust off those old laws that it had used to break up big companies like Standard Oil and AT&T.

ARONCZYK: One of the people we talked to in that show was Scott Hemphill. He's an expert in antitrust law. He's also a professor at NYU Law School. And last week, as soon as this Facebook case was announced, we called him up - got back in touch.

GOLDSTEIN: I am going to play something from the last time we talked. Let's see. You ready? Here.

SCOTT HEMPHILL: Yeah.

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HEMPHILL: The main thing I'd want to do is to take a hard look at tech mergers that have already been consummated and where there may have been an anti-competitive problem at the time.

GOLDSTEIN: Specifically, what are some of those mergers?

HEMPHILL: So the one that jumps out to me is Facebook - Instagram.

GOLDSTEIN: Nailed it.

HEMPHILL: (Laughter).

GOLDSTEIN: When I saw the case yesterday, I actually thought, this is exactly what we talked about on the show almost two years ago. I mean, is it that it was obvious? Was - to anyone who was an expert, was it obvious that this was coming?

HEMPHILL: I don't know the answer to that. I don't know whether it was obvious or not. You know, this was two years ago. I think it has become increasingly obvious.

GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.

ARONCZYK: And I'm Amanda Aronczyk. Today on the show, the case against Facebook.

GOLDSTEIN: Why so many politicians and government lawyers who don't agree on, seemingly, anything else all agree that the government should break up Facebook.

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ARONCZYK: When we talked to Scott Hemphill, the antitrust expert, a couple years ago, he didn't say Facebook's acquisition of Instagram was obviously a problem. He said, maybe it was a problem, maybe it wasn't. We need to figure it out.

GOLDSTEIN: Under antitrust law, intent matters. So one of the essential questions here is why Facebook bought Instagram and, for that matter, WhatsApp. One important fact here - it is legal to have a monopoly. Just having a monopoly does not, on its own, get you in trouble. On top of that, in some cases, it is also legal to have a monopoly and buy other companies. Might be fine, for example, if Facebook bought Instagram and WhatsApp because it thought the combination of the companies would make them better than they would be on their own.

ARONCZYK: The idea is it's good for consumers when an acquisition makes companies' products better or cheaper. That's the free market working as it should. Scott says that may be legal.

HEMPHILL: Facebook, of course, continues to say that the reason that they acquired Instagram was to, you know, turbocharge it, to make it all it could be.

GOLDSTEIN: But on the other hand, if Facebook bought Instagram and WhatsApp because it was afraid that they were going to take away some of Facebook's business, if it bought them because they didn't want to compete against them, that is potentially illegal because a dominant firm buying up competitors so it doesn't have to outcompete them - that, ultimately, reduces choice for consumers. And consumer choice - they call it consumer welfare in the law - that is what modern antitrust law is supposed to protect.

ARONCZYK: So that is the big question. Why did Facebook buy these companies? And one of the things that's happened in the two years since we did that last antitrust series was the government started trying to answer that big question. It started investigating Facebook, looking into these specific acquisitions.

GOLDSTEIN: Part of that investigation was this big hearing you might remember from this summer where the heads of the big tech companies testified before Congress. Mark Zuckerberg testified. Remember, they had, like, a little screen of his face set up, you know, because he was remote. It was like Max Headroom on trial. And he spoke directly to Facebook's acquisition of Instagram.

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MARK ZUCKERBERG: I mean, I think with hindsight, it probably looks, like, obvious that Instagram would have reached the scale that it has today. But at the time, it was far from obvious. A lot of the competitors that they competed with in mobile sharing, including companies like Path - I mean, I don't even think Path exists today. It was not a guarantee that Instagram was going to succeed. The acquisition has done wildly well, largely because we invested heavily in building up the infrastructure and promoting it and working on security and working on a lot of things around this. And I think that this has been an American success story.

GOLDSTEIN: Zuckerberg has also pointed out that when Facebook bought Instagram, it was a tiny company. It had 13 employees. It had no revenue at all. And, you know, people didn't even think of it as a social network. They just thought of it as a photo app for your phone.

ARONCZYK: But the congressional investigation was more than just CEO testimony. Behind the scenes, the House committee also subpoenaed records from the companies so they could try to figure out what Mark Zuckerberg and his colleagues were saying to each other in emails and presentations that happened around the time of the acquisitions.

GOLDSTEIN: As it happens, one of the key staffers working on that House investigation was the other person we talked to in our big tech antitrust show a couple years ago, an attorney named Lina Khan.

LINA KHAN: Yeah, I think you and I met just a few weeks before I joined the House Antitrust Subcommittee.

GOLDSTEIN: By the time we talked to Lina Khan, she had already become famous, or at least antitrust nerd famous, for this paper she published in 2017 when she was still in law school. It was a paper about antitrust law and how it should deal with Amazon and with tech companies more generally.

ARONCZYK: So she talked to us, and then she went off to do that investigation in Congress. And when we talked to her again last week, she told us about her team's investigation of Facebook, in particular about a moment when they were looking into the Instagram acquisition.

KHAN: So the way it works is, you know, the company submit thousands and thousands, if not hundreds of thousands, of emails. You're kind of just, like, mining through them to see if there's anything there. And then when our team came across this email in particular, it was kind of just, like, a, oh, wow, this really exists kind of moment.

ARONCZYK: The email she's talking about is this exchange between Mark Zuckerberg and Facebook's chief financial officer. It took place in early 2012. Facebook was still trying to decide whether or not to buy Instagram. And this email exchange is a big deal in the Facebook lawsuits that were filed last week.

GOLDSTEIN: So it starts when Zuckerberg writes to the CFO about Facebook acquiring companies, quote, "that are building networks that are competitive with our own." He cites Instagram in particular and says, quote, "if they grow to a large scale, they could be very disruptive to us."

ARONCZYK: The CFO replies to Zuckerberg. He's trying to figure out and he's asking, why do you really want to buy Instagram to, quote, "neutralize a potential competitor, acquire talent, integrate their products with ours?" And he says to Zuckerberg, look, if you're just buying them to neutralize a competitor, some other competitor was just going to spring up and take their place.

GOLDSTEIN: And then Zuckerberg writes back. And this is, I think, the key email here. He writes back to the CFO, and he says he does want to neutralize a competitor and also integrate their products with Facebook, says it's both. And he says in this email, even if they buy Instagram and another competitor does spring up, he says, quote, "those new products won't get much traction."

ARONCZYK: In other words, if Facebook buys Instagram, Facebook plus Instagram will be so big that new competitors won't be able to catch up. They won't be able to compete.

GOLDSTEIN: What did you think when you saw that email?

KHAN: That was definitely a moment where we felt, OK, you know, we're onto something. We found something great and compelling, in particular because, you know, there's been speculation for years that Facebook bought up Instagram in order to neutralize a competitive threat. But never did we think that we would be able to find it in an email that in a way that was - it was just so plainspoken and so blatant, frankly.

ARONCZYK: Two months after that email exchange, Facebook announced a deal to buy Instagram for a billion dollars, which was twice as much as the company had been valued at just days before.

GOLDSTEIN: So that is the Facebook-Instagram story. The next key moment comes when Facebook bought WhatsApp. And this one seems a little more subtle to me - right? - because WhatsApp's a messaging app, not a social network, doesn't seem obvious to me as a competitive threat to Facebook. But what Facebook realized that I clearly did not is that messaging apps were what people used most often on their phones, and they used them to communicate with their family and closest friends. Also, WhatsApp was growing like crazy in countries all around the world. And, you know, what is a group chat but a social network coming into being?

ARONCZYK: In one email, Facebook's director of product management called mobile messaging services the biggest threat to our product that I've ever seen in my five years here at Facebook, and we are all terrified.

GOLDSTEIN: Also, Zuckerberg himself told Facebook's board of directors in 2013, quote, "the biggest competitive vector" - whatever - "competitive vector for us is for some company to build out a messaging app for communicating with small groups of people and then transforming that into a broader social network."

ARONCZYK: The very next year, Facebook bought WhatsApp for roughly $20 billion. That's like buying 20 Instagrams.

GOLDSTEIN: That's a lot of Instagrams.

ARONCZYK: That's a lot of Instagrams.

GOLDSTEIN: One thing that's worth noting at this point in the story is both the Instagram and WhatsApp acquisitions were reviewed by the federal government before they went through. The government looked at it and was like, sure, Facebook, you can buy these companies.

ARONCZYK: Facebook now points to those reviews and says, look, if you had a problem, you should have told us at the time. In a statement last week, the company's general counsel said that the Federal Trade Commission and the states, quote, "stood by for years while Facebook invested billions of dollars and millions of hours to make Instagram and WhatsApp into the apps that users enjoy today." And then they said now the agency has announced that no sale will ever be final, no matter the resulting harm to consumers or the chilling effect on innovation.

GOLDSTEIN: We asked Lina Khan about this, and one of the things she says is the government argues in its case that these acquisitions and Facebook's intent in these acquisitions are part of a broader pattern of behavior, that Facebook's behavior has changed over time. And she says you can see this when you zoom out and compare Facebook in its early days to Facebook after it bought up these other companies.

KHAN: When Facebook first entered the market in 2004, it was doing so by really trying to compete with MyScape (ph) and - sorry - with MySpace and with other social networks. And it was really trying to make Facebook good for users, right? It was trying to improve privacy protections. It was trying to improve quality. It was really trying to innovate.

ARONCZYK: But then she says after Facebook got big and bought up its potential competitors, that changed.

KHAN: Once Facebook eliminated the competition, in part through buying out rivals, Facebook was no longer disciplined in this way. And so Facebook, over the last decade, has routinely reneged on privacy commitments. And when Facebook announced the acquisition of WhatsApp, there were a lot of concerns that Facebook would roll back those privacy protections. And then the FTC even told Facebook, listen. You have to honor WhatsApp's existing privacy commitments. And if you don't, that could actually violate the law. Lo and behold, a few years later, despite initially promising that Facebook would not, you know, merge the WhatsApp data with Facebook's data or use WhatsApp data for selling ads, a few years later, Facebook goes ahead and does it anyway. And that really hurt users.

ARONCZYK: After the break, what happens next - WhatsApp-ens next (laughter).

GOLDSTEIN: WhatsApp.

So, OK, those are some of the key pieces of the government's case against Facebook. There's actually two cases - one from all the state attorneys general, the other from the federal government, the Federal Trade Commission. They're probably going to be combined together, and it's likely to take years for the courts to decide the outcome.

ARONCZYK: Now, if Facebook wins, if the government cannot prove that Facebook bought Instagram and WhatsApp because it didn't want to compete with them, then Facebook gets to go on being Facebook.

GOLDSTEIN: But if the government wins, it wants the court to break up Facebook, to make the company spin off Instagram and WhatsApp into separate companies that have to compete against each other.

ARONCZYK: And Scott Hemphill, the guy who saw this case coming two years ago - he says that as these companies compete, they might try to differentiate themselves in order to win over customers.

HEMPHILL: Yeah. So, I mean, you know, for one thing, you might have meaningful choice between social networks in the degree of privacy protection, in the intensity of ads that are shown. You might have an entirely different business model in which one firm is based on advertising and the other one charges you a fee.

GOLDSTEIN: Pay so that you're not getting tracked and you're not seeing ads.

HEMPHILL: That's right.

ARONCZYK: There is a bigger context to this case. For the past generation, as this wave of tech companies got bigger and bigger, there wasn't really much antitrust action. When we did those antitrust shows two years ago, people were asking, is the government going to bring any antitrust case against any of the big tech companies?

GOLDSTEIN: And just in the last few weeks, we have gotten the answer - yes, a big yes. There's, of course, this Facebook case. There was also a case less than two months ago when the government filed what may be, after this one, the second biggest antitrust suit of the last 20 years - the case against Google. And one of the really striking things to me about the Google case to some extent and the Facebook case to an even greater extent is how much support from politically elected officials, specifically state attorneys general, this case has, right? The attorney general of Texas and the attorney general of New York and the attorneys general from all of these very liberal and very conservative states and the Trump administration - they are all on the same side here.

ARONCZYK: And it doesn't seem like what's going on here is that they all suddenly agree on the finer points of antitrust law. It seems more like there's been this sea change, a change in the way politicians from both parties view the big tech companies and the power that they have over our lives.

GOLDSTEIN: If the government does win this case, if a judge does order the breakup of Facebook, it would be part of this hundred-year history of occasional breakups of massive American companies. There was Standard Oil in 1911, AT&T in the early 1980s. And that AT&T breakup, it did lead to more competition. I am old enough to remember when AT&T had its monopoly, and we had to wait until late at night to call my relatives on the East Coast because long-distance calls were so expensive.

At the same time, those breakups, even as they improved competition, they were not necessarily bad for the people who owned the companies. If you owned shares in Standard Oil in 1911 or in AT&T in the early 1980s, when those companies got broken up, you got shares in the new, smaller companies. And if you held on to those shares, you did just fine.

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GOLDSTEIN: If you don't want to give us money but you do want to send us a message, you can try email - planetmoney@npr.org. We're also on the social networks @planetmoney. We're on Twitter, TikTok, Facebook, Instagram. Also, I should note, Facebook, Amazon, Google and AT&T support NPR, and TikTok supports a video series by PLANET MONEY.

ARONCZYK: Today's show was produced by Alexi Horowitz-Ghazi. It was edited by Bryant Urstadt. Alex Goldmark is our supervising producer.

GOLDSTEIN: I'm Jacob Goldstein.

ARONCZYK: And I'm Amanda Aronczyk. This is NPR. Thanks for listening.

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