In the past 15 years, the social networking industry has certainly been one of the fastest-growing industries in the world. A recent study estimated that the global market for mobile social networking stood at 3.2 billion users in the year 2020 and is projected to reach a revised size of 4.9 billion users by 2027, growing at an annual growth rate of 6.5% over next seven years. The numbers depict how deeply personal social networking has penetrated our lives and hence the conduct of these booming service providers has also become more relevant than ever. Other than a host of data privacy concerns raised against these service providers, there have also been recent complaints of antitrust violations being flagged up against them.
Recently, two lawsuits have been filed by the US Federal Trade Commission (“FTC”) & governments of 48 US states and territories, accusing Facebook of eliminating competition by acquiring its competitors and resorting to anticompetitive trade practices. The lawsuit has once again brought the conduct and the present structure of the giant social media company under the scanner. Ian Conner, director of FTC’s Bureau of Competition, has remarked that “Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition. Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive,” This complaint and the statement is particularly interesting as it suggests a significant shift in the United States’ antitrust policy. FTC, which generally follows a non-interventionist approach – unlike the CCI in India and the CMA in the UK, through this complaint seems to have heralded a new era where even the FTC wants to intervene and review the business practices in the digital world.
The FTC’s complaint also resembles very closely to the recent Competition and Markets Authority’s (“CMA”) report on Facebook. Both – the complaint and the report, highlights noteworthy anti-competitive practices adopted by Facebook.
FACEBOOK’S BUSINESS MODEL IN A NUTSHELL
Facebook, formed in February 2004, was one of the first personal social networks to gain significant popularity. In contrast to the limited functionalities of email and messaging, Facebook’s personal social network gained immediate popularity by providing a distinct and richer way for people to maintain personal connections. Generally, personal social networking providers e.g. Twitter, Facebook, Google+, have introduced a unique business model where on one side of the market – the social networking services, there is no monetory price for the services, but on the other side – the digital advertisement, the advertisers are charged heavily and are faced with take it or leave it situation. Facebook too monetizes its businesses by selling advertising that is displayed to users based on the personal data about their lives that Facebook collects. This business model has been highly profitable for Facebook, both in the market of social networking as well as in the display advertising. Advertisers pay billions – nearly $70 billion in 2019 – to display their “specific ads” to “specific audiences”, which is facilitated by Facebook using proprietary algorithms that analyse the vast quantity of user data it collects from its users.
FTC has filed a lawsuit before the District Court of Columbia alleging that Facebook has maintained its monopoly position by buying up companies that present competitive threats and by imposing restrictive policies that unjustifiably hinder actual or potential rivals that Facebook does not or cannot acquire. Facebook’s 2012 acquisition of Instagram for $1 billion and the 2014 acquisition of WhatsApp for $19 billion have been cited as attempts to illegally eliminate competition. Furthermore, the complaint highlights the exclusionary trade conditions imposed by Facebook on third-party applications for using its Application Programming Interfaces (APIs). The case has been filed under S. 2 of the Sherman Act, 15 U.S.C. §2, which the F.T.C imposes through S. 5 of the FTC Act. Section 2 of the Sherman Act penalizes companies for using anti-competitive means to acquire or maintain a monopoly. The suit has been petitioned for a permanent injunction to restrain Facebook from imposing anticompetitive conditions on access to APIs and data, along with a prayer for divestitures of assets, including Instagram and WhatsApp.
DEFINING RELEVANT MARKET
Under every antitrust regime, abuse of dominance investigation begins with defining the relevant market. The relevant market is essentially a tool to identify and define the boundaries of competition between firms. In the instant suit, the personal social networking service is defined as the relevant product market along with the United States as the relevant geographical market. Interestingly, an attempt has been made to define the relevant product market as narrowly as possible. Three key elements have been highlighted that make personal social networking services market distinct from the market for other forms of online services:
That the personal social networking services are built on a ‘social graph’ that maps the connections between users and their friends, family, and other personal connections. This social graph forms the foundation upon which users connect and communicate with their connections. Personal social networking providers use this social graph to inform what content they display to users in the shared social space and when.
That the personal social networking services include features that many users regularly employ to interact with personal connections and share their personal experiences in a shared social space, including in a one-tomany “broadcast” format.
That the personal social networking services include features that allow users to find and connect with other users, to make it easier for each user to build and expand their set of personal connections.
Further, the suit has specifically distinguished the market for personal social networking with; the market for specialized social networking services like LinkedIn as these services are designed for and are utilized by a narrow and specialized set of users primarily for sharing a narrow and highly specialized category of content;
the market for online video or audio consumptionfocused services such as YouTube, Spotify, Netflix as users employ these for passive consumption and posting of specific media content (e.g., videos or music) from and to a wide audience of often unknown users. These services are not used primarily to communicate with friends, family, and other personal connections.
the market for mobile messaging services as these do not feature a shared social space in which users can interact, and do not rely upon a social graph that supports users in making connections and sharing experiences with friends and family.
The second step in an ‘abuse of dominance’ investigation is to assess the market strength enjoyed by the enterprise. The strength of an enterprise is usually assessed through a variety of factors. The FTC’s complaint takes under consideration two important factors i.e. market share and entry barrier, to show that Facebook holds a dominant position in the relevant market. The suit alleges that Facebook has maintained a dominant share of more than 60% in the U.S. personal social networking market since the time of establishment, until the present day.
The suit also alleges that Facebook’s dominant position in the U.S. personal social networking market is resilient, due to significant entry barriers, like direct network effects and high switching costs. A strong network effect is a significant entry barrier because the personal social network is generally more valuable to a user when more of that user’s friends and family are already members, and hence a new entrant faces significant difficulties in attracting a sufficient user base to compete with Facebook. Therefore, even an entrant with a “better” product often cannot succeed against the overwhelming network effects enjoyed by a dominant personal social network.
Another significant entry barrier is in form of high switching costs, which means that the users are reluctant to shift to a new service provider because they have already built connections and develop a history of posts and shared experiences, which they would lose by switching to another personal social networking provider. Thus, significant entry barriers in the market facilitate Facebook’s continuing dominance.
FTC has accused Facebook of using its dominance and strength to deter, suppress and neutralise competition by either acquiring its competitors or by imposing anticompetitive conditions that automatically drive its competitors out of the market.
FTC has alleged that due to the strong network effect existing in the digital market, a competing product can only become relevant at moments of social transition, for instance, with the advent of smartphones, there was a significant transition in personal social networking because smartphones were portable and offered integrated digital cameras, making social networking with family and friends through taking, sharing, and commenting on photographs via a mobile app optimized for that activity increasingly popular. However, Facebook was struggling to provide a strong user experience for this kind of personal social activity. It was built and optimized for desktop use, not smartphones, and its performance with sharing photos on mobile devices was weak. Facebook feared that its personal social networking monopoly would be toppled by a mobilefirst, photo-based competitor emerging and gaining traction. It was soon clear that Instagram was just that competitor and thus Facebook decided to buy than to compete. In sum, Facebook’s acquisition and control of Instagram represent the neutralization of a significant threat to Facebook Blue’s personal social networking monopoly and the unlawful maintenance of that monopoly by means other than merits competition.
Similarly, FTC’s complaint throws light on another social transition that started around 2010 in consequence of the increased popularity of smartphones. Consumers shifted from using traditional shortmessage-service (“SMS”) to using text messaging via the internet through overthe-top mobile messaging apps (“OTT Mobile Messaging Services”). At that time, Whatsapp was emerging as an increasingly popular OTT mobile messaging app. As a result, Whatsapp posed a threat to make a move into the personal social networking market. Facebook’s leadership feared that Whatsapp would serve as a path for a serious competitive threat to enter the personal social networking market as a mobile messaging app as it had reached sufficient scale and just by adding additional features and functionalities, it could enter the personal social networking market at competitive scale and undermine or displace Facebook’s social networking monopoly. Therefore, Facebook neutralized yet another threat by acquiring Whatsapp.
This conduct of Facebook deprived users of the benefits of competition from an independent Instagram or Whatsapp, which had the potential to penetrate the U.S personal social networking market. Moreover, Whatsapp’s strong focus on the protection of user privacy and Instagram’s unique functionality could have provided an important form of product differentiation for them to be an independent competitive threat in personal social networking.
The third aspect of the FTC’s complaint stresses on the imposition of unfair trade conditions by Facebook on access to its valuable platform interconnections – APIs, that it makes available to third-party software applications. To communicate with Facebook ((i.e., send data to Facebook, or retrieve data from Facebook) third-party apps must use Facebook APIs. FTC has alleged that for many years, Facebook has made key APIs available to third-party apps only on the condition that they refrain from providing the same core functions that Facebook offers, including Facebook Blue and Facebook Messenger, and also refrain from connecting with or promoting other social networks. These conditions have helped Facebook maintain its monopoly in personal social networking, in two ways:
First, these restrictive conditions have deterred thirdparty apps that relied upon the Facebook ecosystem, from including features and functionalities that might compete with Facebook or from engaging with other firms that compete with Facebook. This deterrence, according to FTC, suppresses the emergence of threats to Facebook’s personal social networking monopoly.
Second, the enforcement of these conditions by terminating access to valuable APIs hinders and prevents promising apps from evolving into competitors that could threaten Facebook’s personal social networking monopoly.
Facebook has responded to these charges in an extensive post calling these lawsuits as revisionist history. Facebook’s defence can be divided into two parts:
On the acquisition of Instagram and Whatsapp, Facebook primarily contends that the FTC which had itself approved the mergers years ago, cannot now retroactively kill those mergers. Moreover, Facebook has pressed on the defence of ‘consumer benefit’. It argues that both the acquisitions have resulted in better products for consumers. Since the merger, Instagram has grown over a billion users worldwide due to improved features and better experiences. Meanwhile, Facebook has enabled Instagram to help millions of businesses engage their customers and grow. Similarly, Facebook made WhatsApp free worldwide, adding valuable new features like voice and video calling, and making it more secure by encrypting it end-to-end.
On the accusation about the imposition of anti-competitive conditions, Facebook maintains that it had created this platform for innovation on which millions of developers have created new apps, but there are certain thirdparty apps which unfairly duplicate services already being provided by Facebook. The objective behind the imposition of such conditions is to only avoid the use of Facebook’s platform to essentially replicate Facebook. Moreover, these restrictions are standard in the industry, where platforms give restricted access to other developers, while many do not provide access at all, but all of this is only to prevent duplication of core functions.
REMEDYING THE DISTORTION OF COMPETITION BY A MERGER: WHAT DOES THE INDIAN REGIME HOLD?
The FTC’s lawsuit has attracted a lot of academic discussion on powers of antitrust authorities globally to kill mergers retroactively, which they once approved. Under the US Antitrust regime, the Hart-Scott-Rodino Act provides a mechanism for agency review of and preconsummation challenges to reported mergers through a challenge under S. 7 of the Clayton Act. Moreover, nothing in the statute prohibits the agencies from challenging a reported merger at some later stage, including after merger review, merger clearance, and merger consummation. In fact, Section 7(A)(i) of the Hart-Scott-Rodino Act states that any action under this section shall not bar any proceeding or any action with respect to such acquisition at any time under any other section of this Act or any other provision of law. Thus, by the express terms of Section 7(A)(i), the fact that the agencies reviewed and cleared a reported merger does not preclude the agencies from challenging the transaction at a later date.
This problem is more complex under the Indian competition regime as there is nothing like Section 7(A)(i) under the Indian Competition Act. Moreover, under the Indian merger control regime, the transaction which meet the jurisdictional threshold provided under Section 5 constitues a combination and requires the approval of the CCI, while the trasnations which do not neet the threshold limits of S. do not require prior approval. The Indian problem can be analysed in three parts; first, whether the CCI can hear an ex-post challenge to a previously approved combination; second, whether the CCI can hear an ex-post challenge to an unnotified transaction; and third, whether the CCI has the power to grant a structural remedy in terms of causing the breakup of the merged firm or divestiture of the assets of the enterprise. In cases of previously approved mergers, the statute gives a categorical power to the CCI to conduct an expost review of such a merger. Under S. 20(1), Commission can inquire into whether a notified combination under S. 5 has caused or is likely to cause an appreciable adverse effect on competition in India. However, the proviso restricts such review only up to one year of consummation. The question then arises is whether the commission can hear an ex-post challenge after a year of consummation? The answer may lie in S. 3(1) of the Act since the provision specifically includes an acquisition agreement. Therefore, even after a year of consummation, nothing precludes the CCI from conducting an ex-post facto analysis of the acquisition agreement under Section 3. Needless to say, it has to be shown that such trasncation has caused AAEC in the marketSimilarly, for unnotified mergers, since no provision restricts an ex-post review, the CCI has valid powers under S. 3(1) to check the anti-competitive effect of such agreement at any point of time. In India, the problem with the FacebookInstagram-Whatsapp acquisition was that it was never notified as it didn’t fall under the threshold limit and therefore the commission couldn’t even conduct an ex-ante review. However, looking at the wide powers under S. 3(1), the commission today may certainly look at the acquisition agreements in light of the factors under S. 19(3) and pass necessary orders.
On the question of powers of the commission to break up the enterprises, S. 27 and S. 28 of the Indian Competition Act gives the commission vide enforcement powers to remedy the distorted competition in the market. S. 28 empowers the commission to direct division of an enterprise enjoying a dominant position to ensure that such an enterprise doesn’t abuse its dominant position. Moreover, S. 27(g) empowers the commission to pass any order or issue any direction to remedy the abuse of dominance. Thus, by using these unequivocal powers given to it by the statute, CCI can impose structural remedies on already consummated mergers, causing the breakup of the merged firm or divestiture of some of the acquired assets.
It is one thing to see if the antitrust authorities theoretically possess the power to divest assets of a firm, and totally another thing to see if the antitrust authorities would use such power to demerge an enterprise. Despite the antitrust authorities’ ability to challenge reviewed and cleared mergers after the fact and the pro-competitive benefits of such ex-post challenges, the cases of such demergers are extremely rare. That’s the reason why the Competition and Markets Authority (“CMA”), even after finding tech giants abusing their dominance, didn’t take the responsibility of breaking them up. Technical experts have also vehemently argued against breaking up these tech giants as demergers might be counter-productive. Facebook has spent years integrating Instagram and WhatsApp: weaving their ad systems, user profiles, databases and other technology with Facebook. What to the public appear as distinct products are one giant social network on the back end. Therefore, the problem might not be solved only at the grant of prayer for demerger, the Courts would have to play a pivotal role in facilitating such de-merger, keeping in mind the importance of the tech-giant for the US economy. A famous line by an economist is worth keeping in mind, “it is dangerous to apply twentiethcentury economic intuitions to twenty-first-century economic problems”. Whether de-merger is the right solution or resorting to other remedies like compulsory licencing would be viable remains to be seen. However, in this process, one thing the authorities need to keep in mind is that the solution must cure the problem without compromising or disincentivising the innovation. It would be interesting to see how the court goes about developing the remedy package if it holds Facebook abusive of its dominant position.