Facebook breakup isn’t the answer ‘if we are serious about creating competition,’ expert says

The Federal Trade Commission and 48 U.S. attorneys general on Wednesday added to growing pressure to reform social media by filing coordinated lawsuits accusing Facebook (FB) of being an illegal monopoly.

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The actions force into motion disputes that could take years to resolve, yet foretell how regulators envision the social media industry of the future. At the heart of both lawsuits are claims that Facebook’s acquisitions of Instagram in 2012 for $1 billion and WhatsApp in 2014 for $19 billion, as well as other smaller technology companies, were carried out in order to quash competition. The lawsuits also allege that Facebook lured smaller tech companies into integrating Facebook features, then cut off key programming interfaces.

As remedies for the alleged illegal behavior, regulators want Facebook barred from acquiring direct rivals, prevented from cutting off third party companies from access to key components of its network, stripped of its social platforms Instagram and WhatsApp, and restrained from making acquisitions in excess of $10 million without advance notification. Both complaints cited privacy concerns with Facebook.

However, it’s unclear whether these remedies — including forcing Facebook to break off Instagram and WhatsApp — would end the problem of a single social media company gaining market dominance, or push Facebook to become more protective of users’ privacy.

“Breaking up Facebook…I don’t see how it does anything to directly address any of these problems with the social media economy,” Sinan Aral, professor and director of MIT’s Initiative on the Digital Economy and author of “The Hype Machine,” told Yahoo Finance. 

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Mark Zuckerberg, Chief Executive Officer of Facebook, testifies remotely during the Senate Judiciary Committee hearing on ‘Breaking the News: Censorship, Suppression, and the 2020 Election’ on Capitol Hill on November 17, 2020 in Washington, DC. (Photo by Bill Clark / POOL / AFP) (Photo by BILL CLARK/POOL/AFP via Getty Images)

According to Aral, who studies economies such as social media that run on “network effects,” breaking up the market leader by forcing it to divest companies will simply tip the next Facebook-like company into market dominance. 

“If we are serious about creating competition in the social media economy what we need is structural reform of the economy itself,” Aral said. “And that involves two things: One is interoperability, and the other is social network and data portability.” 

Interoperability would allow social media users to seamlessly post and share content between social networks, thereby broadening consumer choice to use platforms they believe deliver the most value. Data portability would allow social media users to move their information from one platform to another, similar to the way that regulators required wireless providers to allow customers to port their phone numbers between carriers.

What would it look like if social media users had more choices?

At least two aspects of the lawsuits suggested remedies hint of regulatory reform, David Dinielli, senior advisor for Big Tech reform advocate, Omidyar Network, and former special counsel with the Antitrust Division of the U.S. Department of Justice, told Yahoo Finance.

One is oversight of Facebook’s application programming interfaces, or APIs. The FTC complaint claimed that Facebook allowed only third-party apps use its APIs if they refrained from offering the same services as Facebook. The other aspect is oversight of Facebook’s future acquisitions. Both potential solutions, he said, could be handled at the regulatory level, instead of, or in addition to, a court order.

“The challenge here is for individuals to start imagining what the world would be like, what it would look like, if we all had choices,” Dinielli said. For example, users could choose to get paid in exchange for agreeing to targeted ads, or choose a pay platform rather than a free platform to acquire use of desired services.

“I could imagine a world in which, for example, TikTok were able to interact through interoperability with Facebook, so that if someone preferred TikTok, they would be able to do whatever they wanted on TikTok and link it to their friends who are on Facebook,” Dinielli said, referring to the short-form video sharing app.

If Facebook opens its APIs to share user data more broadly with competing firms, it would likely be a large benefit to those companies — however Facebook has run into trouble with how it handles user data. It was the exploitation of user data absent user consent that resulted in the Cambridge Analytica scandal, which led to the FTC fining the company to the tune of $5 billion in 2019.

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Instagram Chief Executive Officer and co-founder Kevin Systrom speaks during the launch of a new service named Instagram Direct in New York December 12, 2013. Photo-sharing service Instagram unveiled a new feature on Thursday to let people send images and messages privately, as the Facebook-owned company seeks to bolster its appeal among younger consumers who are increasingly using mobile messaging applications. The new Instagram Direct feature allows users to send a photo or video to a single person or up to 15 people, and have a real-time text conversations. REUTERS/Lucas Jackson (UNITED STATES – Tags: SCIENCE TECHNOLOGY BUSINESS)

As for whether Facebook is staring down a full breakup, NYU law professor, Eleanor Fox says an injunction against Facebook’s alleged bad conduct is a more likely outcome than forcing it to divest Instagram and WhatsApp. She also noted that the case would be a hard one to win, echoing doubts from other antitrust experts. Antitrust experts told The New York Times this week that it will be tough for the government to show that Facebook bought WhatsApp and Facebook specifically to kill competition. And let’s not forget that the FTC approved both of those mergers, the experts pointed out.

“[It’s an] uphill fight but worth doing,” Fox told Yahoo Finance via email. “It could change social media by making entry and success of entrepreneurs/challengers more likely. Failure in the courts could also lead the way to legislative change.”

Aral said legal requirements for social media companies to provide interoperability and portability would be analogous to requirements imposed on AOL and Time Warner at the time the companies merged. 

“What happened during that merger is that we required AOL make its AIM instant messaging platform interoperable with Yahoo messenger and MSN Messenger, and this, after it was forced upon them, they went from 65% market share, to 59%, to 55%, to ceding the entire chat market to new entrants just 3 or 5 years later,” Aral said.

‘Revisionist history’

Facebook’s general counsel, Jennifer Newstead, on Wednesday called the FTC’s lawsuit “revisionist history,” noting that the commission approved the acquisition of both WhatsApp and Instagram.

“The government now wants a do-over, sending a chilling warning to American business that no sale is ever final,” she said in a prepared statement.

“People and small businesses don’t choose to use Facebook’s free services and advertising because they have to, they use them because our apps and services deliver the most value. We are going to vigorously defend people’s ability to continue making that choice.”

According to Dinielli, the point of the two lawsuits is not solely to break up Facebook, but also to ensure that Americans receive the highest quality social network.

Alexis Keenan is a legal reporter for Yahoo Finance and former litigation attorney. Follow Alexis Keenan on Twitter @alexiskweed. Daniel Howley is the tech editor for Yahoo Finance.

Got a tip? Email Daniel Howley at [email protected] over via encrypted mail at [email protected], and follow him on Twitter at @DanielHowley.

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