US sues Facebook over its WhatsApp, Instagram acquisition; alleges it crushed smaller rivals

The US government and 48 states have filed parallel antitrust lawsuits against Facebook, accusing the social media giant of anti-competitive conduct by abusing its market power to create a monopoly and crushing smaller competitors, a move which may force it to sell WhatsApp and Instagram.

Soon after the Federal Trade Commission (FTC) and 48 state attorney generals on Wednesday sued the California-headquartered company, Facebook's shares dropped significantly.

The bipartisan coalition led by New York attorney general Letitia James alleged that Facebook has engaged in a systematic strategy to eliminate threats to its monopoly. This includes its 2012 acquisition of up-and-coming rival Instagram, its 2014 acquisition of the mobile messaging app WhatsApp and the imposition of anti-competitive conditions on software developers.

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According to the federal complaint, this course of conduct by Facebook harms competition, leaves consumers with few choices for personal social networking and deprives advertisers of the benefits of competition.

“For nearly a decade, Facebook used its dominance and monopoly power to crush smaller rivals and snuff out competition, all at the expense of everyday users,” James told reporters at a news conference.

Opposing the lawsuit, Jennifer Newstead, vice president and general counsel of Facebook, described it as revisionist history.

“This lawsuit risks sowing doubt and uncertainty about the US government’s own merger review process and whether acquiring businesses can actually rely on the outcomes of the legal process.

"It would also punish companies for protecting their investment and technology from free-riding by those who did not pay for the innovation, making those companies less likely over the long term to make their platforms available to spur the growth of new products and services,” she said.

The lawsuit is seeking a permanent injunction in federal court that could, among other things: require divestitures of assets, including Instagram and WhatsApp; prohibit Facebook from imposing anti-competitive conditions on software developers; and require the social media behemoth to seek prior notice and approval for future mergers and acquisitions.

“Personal social networking is central to the lives of millions of Americans. Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition. Our aim is to roll back Facebook’s anti-competitive conduct and restore competition so that innovation and free competition can thrive,” said Ian Conner, Director of the FTC's Bureau of Competition.

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The FTC complaint alleged that Facebook undertook a years-long effort to maintain its monopoly through anti-competitive acquisitions and actions that target potential and nascent rivals.

According to the complaint, Facebook is the world’s dominant personal social networking service and has monopoly power in a market for personal social networking services. This unmatched position has provided Facebook with staggering profits. Last year alone, Facebook generated revenues of over USD 70 billion and profits of more than USD 18.5 billion.

The lawsuit alleged Facebook targeted potential competitive threats to its dominance. Instagram, a rapidly growing startup, emerged at a critical time in personal social networking competition, when users of personal social networking services were migrating from desktop computers to smartphones, and when consumers were increasingly embracing photo-sharing.

Facebook executives, including CEO Mark Zuckerberg, quickly recognised that Instagram was a vibrant and innovative personal social network and an existential threat to Facebook’s monopoly power. So, the company bought Instagram rather than compete with it. The acquisition for USD 1 billion in April 2012 neutralises the direct threat posed by Instagram as well as makes it more difficult for another personal social networking competitor to gain scale, the complaint alleged.

Around the same time, it said, Facebook perceived that “over-the-top” mobile messaging apps also presented a serious threat to its monopoly power.

By 2012, WhatsApp had emerged as the clear global “category leader” in mobile messaging. Facebook chose to buy an emerging threat rather than compete, and announced an agreement in February 2014 to acquire WhatsApp for USD 19 billion.

Facebook’s acquisition of WhatsApp both neutralises the prospect that WhatsApp itself might threaten Facebook’s personal social networking monopoly and ensures that any future threat will have a more difficult time gaining scale in mobile messaging, the complaint said.

Meanwhile, top US lawmakers hailed the twin antitrust lawsuits against Facebook, noting that the accountability was "long overdue".

Indian-American Congresswoman Pramila Jayapal said in August, she repeatedly asked Zuckerberg about the well-documented instances of Facebook copying, acquiring and killing their competitors.

However, public policy think tank Information Technology and Innovation Foundation president Robert Atkinson said the antitrust actions "threaten both the US competitiveness and US consumers".

Silicon Valley enjoys tremendous success globally in part because US tech firms innovate quickly, including through acquisitions that allow them to bring in new talent, intellectual property, and more users. Companies and investors are going to lose faith in regulators if policymakers want to reverse course on prior decisions and call a mulligan this late in the game, he said. 

By Lalit K Jha.