Almost 70% of adults in the United States used Facebook in 2018. Interestingly, Facebook does not charge any of its 2.45 billion active users for access to its platform, but instead generates revenue by collecting and analyzing personal data to sell targeted advertisements. This enormous user base is the foundation of the company’s dominance in the social-networking industry. Indeed, Facebook-owned companies account for 90% of all time spent on social-networking sites. As a result, nearly 84% of all online social advertisement spending is paid to Facebook.
However, with great power comes great responsibility, and Facebook’s business and data privacy practices have come under legal scrutiny. After the FTC fined Facebook $5B in 2019 for the company’s role in the Cambridge Analytica scandal, the FTC, DOJ, and House of Representatives indicated they were undertaking antitrust inquiries into the company. Several of these investigations are nearing completion, with the FTC expected to file a complaint in the coming months, and the antitrust subcommittee expected to publish its findings and legislative proposals this month. As the public awaits the findings of these inquiries, Facebook has reportedly published a document which refers to any potential breakup of Facebook companies as “a complete nonstarter. . . .” Those in favor of mandating a breakup of Facebook directly attribute the issues plaguing the social media industry to a lack of competition. In theory, requiring Facebook to sell off assets such as Instagram and WhatsApp to third parties would promote competition in the industry.
Antitrust investigators must determine if Facebook violated antitrust law, and, if so, if divestiture is the appropriate measure to restore competition.
Antitrust, Privacy, and Insufficient Competition
Antitrust law stems from late 19th century concerns that monopolies were exerting immense control over the supply and price of essential products like steel and oil. However, modern antitrust law seeks to cure more than just unfair pricing. The goal of antitrust law is to maximize consumer welfare, generally defined as the difference between what each consumer pays and what they would be willing to pay. While consumer welfare may often be defined with regards to price, the concept includes non-price considerations such as reduced product quality and variety as well. Given that Facebook provides access to its platform at no monetary cost to users, evaluating consumer welfare strictly on price would be a mistake. Instead, a serious analysis requires considering the quality of its social media products and the variety of competing platforms available to consumers.
Evaluating product quality in the social media industry necessitates not only analysis of the functionality of the platform itself, but also of the platform’s data privacy practices. Facebook publicly pledged itself to privacy in 2004, when the company promised not to use cookies to collect user information. Since this pledge, Facebook has consistently failed to adequately protect user data. These failures are not limited to the 2015 Cambridge Analytica scandal, but include Facebook conducting a mood manipulation experiment on unknowing users in 2014 and exposing the email addresses of millions of users in 2013. Despite the glaring inadequacies in Facebook’s data privacy practices, the company continued to grow by acquiring promising young competitors Instagram and WhatsApp, effectively squashing any meaningful competition in the market. Instagram and WhatsApp have both grown exponentially since being acquired, only to strengthen Facebook’s vast user base. Critics argue the user base Facebook developed through these acquisitions helped insulate the company from the external market pressures that initially motivated the company to prioritize data privacy.
In light of the relationship between reduced competition and declining product quality, federal antitrust investigations may determine that Facebook is in violation of United States antitrust law. Once it has been established that deteriorating data privacy practices and reduced competition constitute violations of antitrust law in this context, prosecutors must determine the appropriate remedy. There are generally two types of remedies under antitrust law: structural and conduct remedies. While Facebook may view any mandated breakup as a “nonstarter,” divestiture has gained widespread support after endorsements from Bernie Sanders, Elizabeth Warren, and Facebook’s co-founder Chris Hughes. Divestiture is a structural remedy requiring a firm to sell off company assets in order to promote competition in the market. With regards to Facebook, divestiture specifically refers to requiring Facebook to sell Instagram and WhatsApp, its two most successful recent acquisitions. While divestiture has gained popularity amongst political figures, some experts argue that such structural remedies are merely preferred because they are easier to implement. Conduct remedies, on the other hand, tend to be the more appropriate resolution.
Divestiture or Regulation?
Divestiture is also an extreme measure. Two of the most notable mandated divestitures were the 1911 divestiture of Standard Oil of New Jersey and the 1984 breakup of AT&T, both of which have since been the subject of much scrutiny. Critics of the Standard Oil divestiture argue that the remedy was ineffective because the original owners retained their shares in each of the thirty-four subsidiaries formed. Further, some attribute increased competition in the industry to the popularization of the automobile and the increase in its supply. Similarly, critics of the 1984 AT&T breakup argue that divestiture was unnecessary to achieve increased competition in the industry, pointing instead to the adoption of effective regulations which required AT&T companies to provide equal access to long-distance and information service providers.
When considering a divestiture of Facebook, however, perhaps the most compelling comparison is the 2001 antitrust investigation into Microsoft. While the court originally required divestiture of Microsoft assets, such as Internet Explorer, Microsoft ultimately avoided divestiture by agreeing to a creative settlement. This settlement, similar to the additional AT&T regulations discussed above, required Microsoft to share its application programming interfaces with competitors, and provide access to Microsoft source code. The type of regulatory remedy in the cases of Microsoft and AT&T should serve as an example of the ideal remedy for Facebook’s antitrust violations. While divestiture may be an easily applied remedy, the history of large scale divestitures indicates that requiring the monopolist to work cooperatively with competitors maximizes consumer-welfare more efficiently than divestiture.