Facebook antitrust cases could accelerate power balance shift for social media | Marketing Dive

In moves that could shift the balance of power in social media and the wider digital ecosystem, the Federal Trade Commission (FTC) and more than 40 states on Wednesday filed separate antitrust lawsuits accusing Facebook of being a monopoly that uses its market dominance to squash rivals and vacuum up smaller competitors.

The development, while noteworthy in being the first U.S. antitrust action against Facebook, was expected following an 18-month investigation into the company by federal regulators and the state attorneys general. Critically, fresh legal challenges arrive as Facebook contends with some of the most serious external competitive threats to its business in years, including the video-sharing platform TikTok, which surpassed 2 billion global downloads in the spring, according to researcher Sensor Tower.

Taken together, rising competition and a hard regulatory crackdown could unseat a company that has become the second-largest digital advertising platform in the world. And the regulatory crackdown is primed to be significant: In a dramatic gesture, the FTC complaint pushes for Facebook to divest photo-sharing app Instagram and messaging service WhatsApp, two properties that have become core growth engines for the social networking giant as its namesake platform slows down. Facebook bought Instagram for $1 billion in 2012 and WhatsApp for $19 billion two years later. The sense from regulators now is that it was a mistake to ever approve those acquisitions, and that a Facebook breakup is the long-awaited reckoning for a company that has stretched its tendrils too far for too long.

“Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition,” Ian Conner, director of the FTC’s Bureau of Competition, said in a press statement. “Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive.”

The news arrives less than two months after another antitrust complaint filed by the Department of Justice against Google, the only advertising platform larger than Facebook. Sharper scrutiny cast on Big Tech stalwarts suggests seismic changes are inbound not only for internet users, but also the advertisers that rely on Google and Facebook to reach millions of consumers. Advertisers have increasingly expressed their own displeasure with those same platforms, with many boycotting Facebook last summer over its failure to curb hate speech and misinformation. The rise of newer apps like TikTok and a pandemic-driven windfall for comparatively older rivals like Snapchat shows brands today no longer have a shortage of alternatives to turn to as the so-called duopoly lands on shakier ground.

“The long-term possibilities are vast at this point,” Jay Friedman, president of programmatic services provider Goodway Group, said of the antitrust suits over email. “Everything from a settlement and fine with stricter oversight in the future to a full breakup is possible. Short-term this gives competitors and upstarts a window to innovate and create while Facebook is under the strongest microscope yet.”

Pillars of growth

Facebook has landed in the FTC’s crosshairs before, and paid the agency a record $5 billion fine last year in the wake of the Cambridge Analytica data-privacy scandal from 2018. That Facebook could take such a penalty in stride speaks to its formidable stature and cash troves. It generated revenue of $21.5 billion in the third quarter of 2020 alone — the vast majority of it from advertising — and has seen engagement with its app suite skyrocket as people look to stay connected during the pandemic.

Regulators have broadly struggled to reign in internet companies that wield massive influence, but influence doesn’t always create tangible harm to consumers, who don’t have to pay for products and services like the free Facebook and Instagram apps. The FTC and 46 states, as well as the District of Columbia and Guam, in their respective lawsuits center their arguments on the business harm Facebook has done in either buying or squelching rivals, which, in turn, allegedly limits consumer choice as people spend more time online.

Instagram once worried Facebook CEO Mark Zuckerberg as the company raced to stake out a larger claim in mobile photo-sharing nearly a decade ago. Rather than continuing to compete with the upstart, Facebook bought it in a deal that eventually won unanimous regulatory approval. Instagram is now projected to exceed 1 billion global users this year, according to Insider Intelligence. Over time, Instagram has grown popular enough to start siphoning users and engagement away from the core Facebook platform, the FTC complaint said — a signal that Facebook being forced to spin off the app could seriously curtail its business.

“Facebook has become a powerful player in digital advertising over the years, not only because of the growth of the core Facebook social network but also because of the way Instagram has become intertwined with Facebook’s ad buying system,” Debra Aho Williamson, principal analyst at eMarketer, which is owned by Business Insider parent Axel Springer, said over email. “This year, we expect Instagram will take in 12% of U.S. digital ad spending, more than double its percentage of just two years ago.”

WhatsApp isn’t a moneymaker for Facebook, but it’s the most popular messaging service in the world with over 2 billion global users, most of them based outside the U.S. Facebook has recently embarked on a quest to better monetize WhatsApp, as reported in Bloomberg, and has continually added new shopping capabilities and customer service features to the platform. Earlier this month, it acquired Kustomer, a customer relationship management platform, for $1 billion in a deal to bolster the messaging business’s prospects. If losing Instagram would kill off Facebook’s revenue darling at the moment, then losing WhatsApp could cut off the company’s next big opportunity to reshape the internet.

And while those are the most existential risks for Facebook, the antitrust cases could change the equation in other ways. Facebook has always been aggressive about cribbing features from competitors, most famously stories, a dissappearing photo- and image-collage format, from Snapchat. In August, Facebook’s Instagram introduced a short-form video feature called Reels that closely mirrors TikTok.

“With a suit filed, it will be much riskier for Facebook to introduce new features to its platforms that appear to copy competitors’ differentiators,” Friedman said. “If TikTok or other platforms had been holding back releasing any features — for whatever reason — now is a time these platforms could take advantage of this.”

There is ultimately no real precedent for the FTC’s case, since comparable suits against Microsoft and AT&T predate an era when the internet and social media dominate consumers’ lives. Those cases can still be instructive in gauging how the social media market could move in response to a potential breakup.

“Antitrust break-ups in the telecoms industry in the 1980s and with Microsoft in 2001 opened the markets to other players,” Forrester analyst Jessica Liu and researcher Sarah Dawson wrote in a blog post about the antitrust action. “Facebook, Inc. will simply continue its established practice of copying competitors with poorer versions — but in apps that rely on an aging user base as younger cohorts seek newer experiences like TikTok and Triller.”

Flagging empire

Any legal battle to break up Facebook will likely take years to resolve, and the social network is already strongly condemning the FTC’s actions.

“Now, many years later, with seemingly no regard for settled law or the consequences to innovation and investment, the agency is saying it got it wrong and wants a do-over,” Jennifer Newstead, vice president and general counsel at Facebook, wrote in a fiery blog post responding to the lawsuit. “In addition to being revisionist history, this is simply not how the antitrust laws are supposed to work.”

Facebook has seemed to steel itself for this moment in other ways. The company is in the middle of an ambitious, years-long plan to unify all of its services technologically on the back end, which might make them harder to separate. In September, Facebook started enabling some cross-app functionality in the chat features of Instagram and Messenger, and it plans to eventually layer WhatsApp into that equation.

“The apps are inextricably linked and while any breakup sounds good on paper, in practice, duplicative feature/functionality across its apps already exist,” Liu and Dawson wrote.

The upshot is that breaking up Facebook will not be easy, and even if the FTC is successful, changes will not occur overnight. Brands are unlikely to jump ship en masse, if at all. Facebook provides unmatched reach among the social platforms, as well as wielding a rich advertising network and suite of ad products and content formats to engage consumers.

“Money flows where people spend their time online, if users keep using Facebook products – and I don’t see any reason why they should suddenly stop — big investments will keep coming,” Roberto Pizzato, head of marketing at programmatic performance company MainAd, said in emailed comments.

Still, it’s hard not to view the moment as the biggest sign yet of a dominant platform showing signs of decline. Regardless of the outcome of the FTC case, Facebook’s bargaining chips will see their valued lessened in the wake of such historic legal challenges as the company tries to balance running one of the farthest-reaching digital operations in the world while justifying its scope.

“The key will be for Facebook to keep up with the quality of its ecosystem regardless of new regulations that could be limiting their ability to manage data and negotiations with brands. The impact could be that the company founded by Zuckerberg will have less power to negotiate deals,” Pizzato said.

“That said, the history of the web is an example of how U-turns and disruptive changes can happen quite quickly,” Pizzato added. “Facebook’s exceptionalism couldn’t last forever, in particular now that the consequences of its dominance are so clear and deeply rooted in the most pressing issues of our times – i.e. fake news, hate speech, level playing field, privacy and the digital economy.”

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