Merger & Acquisitions, Data Privacy & Security

FTC v. Facebook: Can U.S. Antitrust Law Adjust to the Internet Age

Society leads, and the law follows.

This is especially true in antitrust, where industries and markets undergo constant change brought about by innovation and changing consumer behavior. Confronted with ever evolving commercial circumstances, the courts face a constant struggle to keep up. With the filing of the antitrust cases against the Facebook “monopoly” by the Federal Trade Commission and 47 state attorneys general, U.S. antitrust faces one of its most significant tests since the case of U.S. v. Microsoft, now 20 years old.

In the intervening decades, the Internet has spawned a new category of industry, “demand aggregators.” These businesses seek to grow market share not just by capturing supply, but also demand. The power of the dominant digital platforms—Google, Apple, Facebook, Amazon, Uber—arises as much or more from their position as the source of customers than as a supply of goods or services. Of course, the platform must be able to deliver, but when customers view your website as the place to go—Amazon for goods, Uber for rides, Facebook for friends—the supply will follow.

Demand-side dominance is only one of the thorny issues the court will have to resolve in the antitrust authorities’ cases against Facebook, which accuse the company of monopolizing the market for personal social network services. Telephone service was once the quintessential example of a “natural monopoly,” because one provider of copper wires can serve the requirements of the market at lower costs that can be achieved by allowing competition. In much the same way, one large social network may be more useful than two or more fragmented ones. But in the case of the telephone system, a compromise was reached that allowed AT&T to retain its monopoly but subject to governmental regulation.

In bringing these cases, antitrust enforcers are taking a different approach to Facebook’s dominance (and all that comes with it) by asking for a court-ordered remedy to restore competition. The enforcers will confront some difficult questions. In seeking to enlarge a platform that is arguably more valuable the larger it gets, what did Facebook actually do to violate the law? How do the enforcers demonstrate that “competition” is better than monopoly when it comes to social networks? And what, precisely, can the court do to change the structure of an industry that appears to have arisen out of the technological and economic features of the online world?

There will be plenty of other, more specific issues about Facebook’s conduct, about the evidence of economic harm, and about the future of antitrust jurisprudence, and plenty of time to comment as the cases proceed. For example, the cases allege the monopolizing effects of Facebook’s past acquisitions of Instagram, WhatsApp, Onavo and others. In contrast to actions seeking to prevent unlawful mergers in their incipiency, the court will be entitled to expect evidence that these transactions caused actual economic harm. The allegations of higher advertising prices are likely to be key, but the complaint also allege a loss of innovation, variety, and consumer privacy. How the court adjudicates these harms will reveal much about the capacity of antitrust to adjust.

For now, it is enough to observe the enormity of the challenge laid before the court to adjudicate competition law in an entirely unfamiliar industrial environment. Watch this space.

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