Facebook used its “monopoly power to crush smaller rivals [and] snuff out competition” argue 48 US states – along with the Federal Trade Commission (FTC) – which in two mammoth lawsuits want it to sell off Instagram and WhatsApp.
The most damning quote comes from Facebook CEO Mark Zuckerberg himself, who wrote in a 2008 email about smaller competitors: “it is better to buy than compete”.
There you have it, the Zuckerberg Approach to Innovation in a sentence.
This email is included in the FTC’s filing, which argues that Facebook had a “systematic strategy to eliminate threats to its monopoly” and Zuckerberg “acquired Instagram to neutralise a competitor”.
The two major lawsuits are the inevitable conclusion of the rise and fall of big tech and its social media giants. US lawmakers called the CEOs of Amazon, Apple, Facebook and Google, through its holding company Alphabet, to hearings in August where they faced blistering questions about anticompetitive practices to maintain their monopolies and dominance. Two months ago Google was sued by the US Justice Department, the first consequence of those hearings.
Spearheaded by fiery New York attorney general Letitia James, the 48 states contend Facebook abused its “dominance and monopoly power to crush smaller arrivals and snuff out competition, all at the expense of everyday users,” she said last week.
Using its “vast troves of data and money, Facebook has squashed or hindered what the company perceived as potential threats” using a “buy or bury strategy to impede competing services”.
She called the US$1bn Instagram purchase in 2012 – “when the company did not even have a cent in revenue” – and the 2014 acquisition of WhatsApp for the “extravagant” amount of $19bn – “which was far more than industry experts and even Facebook itself valued the company” – the “two most glaring examples of this unlawful scheme” to maintain its market dominance in social networking.
The ultimate result, she said, is “reduced choices for consumers, stifled innovation and degraded privacy protections for millions of Americans” and a few billion of those of us in the rest of the world.
James also highlighted the dominant role played by Zuckerberg, who has insulated himself from criticism using a sophisticated share voting structure that allows him to retain control of the company he co-founded.
“You will face the wrath of Mark,” she quoted a Facebook executive saying about smaller rivals or apps who stepped out of line.
This “illegal behaviour” was all in defence of Facebook Blue, as the main app is known internally.
Zuckerberg quite rightly described this legal assault as an “existential” threat to Facebook, not least because the FTC is seeking for Facebook to offload Instagram and WhatsApp, an outcome James has also vowed to pursue.
The FTC says Facebook tried to preserve its monopoly in social networking using “anticompetitive conduct with the aim of suppressing, neutralizing, and deterring serious competitive threats to Facebook Blue”.
There were three main elements to this strategy, it argued in its court filings last week: “acquiring Instagram, acquiring WhatsApp, and the anticompetitive conditioning of access to its platform to suppress competition”.
However, the FTC points out, despite the efforts to prevent Instagram from “cannibalizing” the major app, “Facebook Blue has lost users and engagement to Instagram”.
Legal experts predict this will take years of wrangling before a final conclusion is reached. Zuckerberg, who has previously defended Holocaust denialism, said the legal action would take “years to play out in its entirety”.
He said: “we disagree with the government’s allegations and we plan to fight this in court. We compete with many other services in everything we do, and we compete fairly.”
Facebook is expected to argue that its purchases were approved at the time, which the US regulators and states will have to prove was part of the “illegal behaviour” that James charges.
If Zuckerberg’s soon-to-be-famous line – “it is better to buy than compete” – appears like a smoking gun, so does another email that was revealed by US lawmakers in their scathing report after the August hearings. In that 2012 email – sent on the April day Facebook announced it was buying Instagram – Zuckerberg wrote in a private message: “I remember your internal post about how Instagram was our threat and not Google+. You were basically right. One thing about startups though is you can often acquire them”.
Bang. Those two lines may become as deeply associated with Zuckerberg as his infamous contention in 2010 that privacy as we know it is over: ”People have really gotten comfortable not only sharing more information and different kinds, but more openly and with more people. That social norm is just something that has evolved over time,” he said.
It’s worth noting that the legislation that will be called on in these very digital times is the Sherman Act of 1890. Yes, a 130 year old law. It was famously used to break up Standard Oil in 1910 – owned by a man then thought of the richest person to have ever lived, John D Rockefeller – and was used again to split up AT&T in 1984.
As James points out, “while consumers have been spending their time keeping in touch on Facebook, Facebook has been spending its time surveilling user’s personal information and profiting from it”.
She added: “No company, no company should have this much unchecked power over our personal information and our social interactions”.
This is just the first round in a long legal battle that is undoubtedly going to see Facebook employ Zuma-like stalling tactics.
This article first appeared in the Financial Mail.
