Face value

Facebook paid $1bn for Instagram in April 2012.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020} Last year the company’s total revenue was $70.7bn.^{3SECFacebook, Inc. Form 10-K for fiscal year 201930 Jan 2020} The price of the photo-sharing app is thus about 1.4% of one year’s takings, which makes it the cheapest insurance policy in the history of Silicon Valley, if the Federal Trade Commission is right about what was being insured.

On 9 December the commission, working with the attorneys-general of 46 states, the District of Columbia and Guam, sued Facebook for illegal monopolisation.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020} The complaint says the company bought Instagram, and in 2014 WhatsApp for $19bn,^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020} to neutralise rivals, and asks a federal court to consider forcing Facebook to divest both.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020} We think the government has a respectable case on the first deal and a thinner one on the second. We also think that asking a judge to unwind deals eight years old is the wrong way for a competition regime to behave, however satisfying it feels.

The prize. Facebook, total revenue, $bn

	Revenue
2017	40.7
2018	55.8
2019	70.7

Source: Facebook Form 10-K, fiscal 2019

Start with what the commission alleges. Its press release says Facebook’s own executives, including Mark Zuckerberg, saw Instagram as “an existential threat to Facebook’s monopoly power”.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020} If true, that is an uncomfortable thing to think about a company one then buys. The complaint adds a second charge: that Facebook, having bought some rivals, hobbled others by controlling access to its platform. After Twitter launched Vine in 2013, it says, Facebook shut off the interface that would have let the video app reach users’ friends.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020} The commission wants Facebook barred from imposing such conditions on developers, and made to give notice of, and win approval for, future deals.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020}

The money explains the stakes. Facebook’s revenue rose from $40.7bn in 2017 to $70.7bn in 2019,^{3SECFacebook, Inc. Form 10-K for fiscal year 201930 Jan 2020} an increase of three-quarters in two years. The commission puts the company’s profit last year above $18.5bn.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020} A firm that earns that much from a network its users find hard to leave has every incentive to pay a modest price for the next thing that might let them leave. The theory is that a dominant firm facing a young challenger can, rather than outcompete it, simply write a cheque.

Facebook’s answer is a good one, and the government should not wave it away. Jennifer Newstead, its general counsel, calls the suit “revisionist history”, observes that the commission “cleared these acquisitions years ago”, and says the government “now wants a do-over, sending a chilling warning to American business that no sale is ever final”.^{2TheWrapFacebook slams FTC antitrust lawsuit as 'revisionist history'9 Dec 2020} She adds that antitrust laws “exist to protect consumers and promote innovation, not to punish successful businesses”, and that people use Facebook’s apps because they “deliver the most value”.^{2TheWrapFacebook slams FTC antitrust lawsuit as 'revisionist history'9 Dec 2020}

Take the last point first, for it is half right. Instagram and WhatsApp are free to users, and neither looks starved of investment since Facebook bought them. Consumer harm, the usual test, is hard to show when the price is zero. The commission’s better argument concerns the market that never appeared: an Instagram that kept growing as an independent rival might have forced Facebook to improve, or to charge advertisers less. That is a counterfactual, and counterfactuals are what courts are bad at.

The “no sale is ever final” objection is stronger still. Entrepreneurs sell to big firms because they expect the sale to stick. If a merger the government approved can be reopened eight years later, founders will price in that risk, and the price they are offered will be lower. The commission looked at these deals in 2012 and 2014 and let them through. Whatever it missed, it missed with the power to ask for more. To punish Facebook for the regulator’s earlier lapse would reward the lapse.

Yet the objection proves less than Facebook hopes. Clearance is not immunity; nothing in the law says a closed deal cannot be one step in a scheme to keep a monopoly, and the documents the commission now cites may not have been the ones in front of it then. Nor is the commission united. It authorised the suit by three votes to two, with Noah Phillips and Christine Wilson against.^{1Federal Trade CommissionFTC sues Facebook for illegal monopolization9 Dec 2020}

So what should be done? Not a breakup. Separating Instagram and WhatsApp from Facebook would take years, would upset services that users plainly like, and would be a remedy chosen for its drama. The better remedies are the narrow ones already in the complaint: open access for developers, and scrutiny of Facebook’s future purchases. Those can be policed with a stopwatch and a spreadsheet. The case should be fought on Instagram, judged on the evidence, and settled with rules rather than scissors.

The commission has asked a court to decide whether a $1bn purchase was an act of competition or a way to avoid it. It is doing so after the fact. That is the real indictment: not of Facebook alone, but of a system that learns what a deal meant only after the deal has been digested.