Photo by Esther Vargas on Flickr
Joe Schick, Associate Member, University of Cincinnati Law Review
I. Introduction
Facebook has had a rich history of run-ins with federal and foreign regulators in its brief 16-year existence. Among those include multiple congressional testimonies by its CEO Mark Zuckerberg, a record-breaking five-billion-dollar penalty from the FTC, and seemingly never-ending litigation in the EU over breach of privacy and antitrust accusations. On July 29th, the antitrust subcommittee of the House Judiciary Committee virtually hosted Zuckerberg along with other major technology company CEOs from Apple, Alphabet (Google), and Amazon.[1] These companies account for four of the top five U.S. publicly traded companies by market capitalization (the only missing party was Microsoft, which had its fair share of antitrust attention in the late 1990s).[2]
Both sides of the political aisle have expressed interest in going after the “Big Tech” firms. As Congress has been pondering what to do with them, the Federal Trade Commission (“FTC”) is already kicking the tires at going after Facebook for its mergers with Instagram and WhatsApp.[3] The Instagram and WhatsApp mergers took place in 2012 and 2014 respectively. Regardless of when the mergers took place, it is still possible for a judge to order it reversed under the CAA.[4]
Antitrust law is a vast, fact-driven body of law that many lawyers dedicate their entire careers to. This article is meant to give a snapshot to the way the FTC analyzes these problems through its own guidance and commentaries, while examining the likelihood of a Facebook antitrust suit over Instagram. Even if a lawsuit is unsuccessful, high profile litigation of this kind can have a substantially negative impact on a company’s stock price and in the court of public opinion. The recent attention paid to Facebook begs the question: under the FTC’s framework for analyzing mergers, will it seek to break up Facebook and Instagram?
II. Legal Background
The Clayton Antitrust Act (“The Act”) of 1914 gave the newly formed FTC its teeth in stifling anti-competitive behavior in the marketplace. Section 7 of the Act gives the FTC oversight over all mergers, which is where two or more companies combine to create a single entity.[5] Section 7 prohibits mergers “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition.”[6] Divestiture, or reversing the merger, is a “common form of relief” when a merger is determined unlawful after the fact.[7]
The framework for an FTC investigation under Section 7 is determined by the type of merger that has or is to taking place. For horizontal mergers, like with Facebook and Instagram, the FTC typically utilized a four-part, non-sequential balancing test in determining whether to pursue action. It includes: (1) market definition and concentration; (2) potential adverse competitive effects; (3) entry analysis; and (4) efficiencies.[8] Per its own guidelines, the agencies’ focus is on competitive effects, each investigation is heavily fact-specific, and the same evidence is often used for multiple elements.[9]
The FTC starts with the first factor, market definition and concentration, so that it can properly filter through the relevant anti-competitive behaviors for a specific area of the economy.”[10] Multiple markets can be at play however, as the FTC does not want to unnecessarily box in the company’s activities.[11] “Market concentration” is measured by the Herfindahl-Hirschman Index (“HHI”), which calculates the concentrating effect of the merger, weighted by how concentrated the specific market already is. It is meant merely as an objective numerical factor to consider.[12] Next, the FTC analyzes the remaining factors of the 4-factor test.
The second factor, “adverse competitive effects”, includes what are called “unilateral effects” of the merged company to the relevant market.[13] Common examples include: spurned innovation, increase in prices from supply manipulation, and decreased bargaining and auction power of buyers.[14] It can be especially relevant if the merged companies were, or would have been considered, direct competitors in the relevant market.”[15] The FTC will also look to see if one of the merged companies was considered a “maverick” in the market that played a “disruptive role in the market to the benefit of customers”.[16] For example, if the company had introduced a novel technology or business model into the space.[17]
The third factor, “entry”, refers to the validity of potential firms entering the relevant market after the suspect merger takes place. The FTC will analyze the timeliness, likelihood, and sufficiency of a firm successfully entering the specific market and competing with the merged company.[18]
The fourth factor, “efficiencies”, account for the improvements in the product and services of the merged companies acquired through the merger that could offset the negative effects to competition (i.e., price increases).[19] This element is difficult for the FTC to analyze as information revealing efficiencies is often closely held by the merging companies.[20] The FTC also emphasizes that even when efficiencies outweigh the negatives created through a merger, it nearly never justifies the “forming of a monopoly or near-monopoly”.[21] Therefore, even when a near-monopoly is formed that is a net benefit to consumers, the FTC will still examine the merger with significant scrutiny through the other factors. The FTC emphasizes that these four factors are integrated, meaning they affect one another. For example, an adverse effect could be quickly cancelled out by a high ability of entry from other firms into the specific market.[22] Therefore, if the FTC believes one factor does not point to an anti-competitive result, it is likely multiple factors point do not as well, and vice versa if a factor does point to anti-competitiveness.
III. Discussion
The Facebook-Instagram merger was horizontal in nature, as the two companies operate in the same industry (photo-sharing social networks) and did not operate on different levels of the same supply chain. The FTC will likely look at the digital advertising platform market to determine whether the factors weigh in favor of reversing the merger. Other major competitors in this space would be firms such as Google, Amazon, Snapchat, Bing and Twitter. The FTC would deploy its HHI method for analyzing the increase in market concentration, but for the sake of simplicity the market share of online sharing will be used as its proxy. Market share of digital ad sales for Facebook-Instagram sits at an estimated 23.4% as of June 2020.[23] Instagram represents approximately 31.8% of that figure, totaling 7.4% of the total market.[24]
Next, the FTC could very likely find negative unilateral affects from the merger. Instagram’s mobile app experience in 2012 was considered ahead of its time, and was regarded by many to be superior to Facebook’s “cluttered” desktop experience, who did not yet have a mobile app.[25] In documents released from this July’s antitrust subcommittee hearing with Big Tech CEO’s, it was revealed Zuckerberg viewed Instagram as a company that “could be very disruptive to [Facebook]” if given the chance to grow.[26] The FTC could argue Facebook intended to preemptively take out the “maverick” Instagram to stymie a direct competitor. The FTC approved the merger back in 2012 because both platforms were free to users regardless, thus making it difficult to prove harm would occur, but this was before Facebook and Instagram became the online advertising juggernauts we know of today, making digital advertising more of a focus for the FTC this time around. [27] However, it is difficult to assess the difference in affordability for advertisers with these platforms, as Facebook and Instagram’s price offerings include auction programs to give ad space to the most lucrative bidders. Costs per impression or install are also difficult to assess in real economic terms as those metrics can mean different things to different types of advertisers.
Analyzing entry into the online advertising space could present an interesting challenge for the FTC. Amazon has emerged from relative obscurity in the space to owning nearly 10% market share, so it appears at least one major player has not been held back.[28] Online platforms need to reach a critical mass of users before attracting a lucrative amount of advertisers. This makes it difficult to look at barriers in the space with specificity, because barriers to advertising platforms are barriers to gaining an online audience generally. This is partly because the whole purpose of online advertising is to meet the consumers where they spend time. These factors will have to be balanced with the reality that web-based start-ups are generally not capital intensive, and garner massive attention from venture capital firms, encouraging new players in the space. For example, Instagram only had 13 employees before it merged with Facebook, while generating no revenue at the time.[29]
Facebook and Instagram have likely gained several efficiencies from merging. For instance, advertisers can run cross-platform campaigns between the two, which can reduce the cost per online impression for the advertiser.[30] Consolidating sales and support staff undoubtedly cuts costs like any other merger, which could theoretically be passed on to the consumer. It must be noted that the FTC will not consider efficiencies it believes Instagram would have gained on its own through organic growth, absent of the financial and managerial support it received from Facebook.[31] This means that any advances Instagram could have made had it not been acquired by Facebook will not factor in to the FTC calculus.
IV. Conclusion
The FTC will most likely not pursue action to split up Facebook and Instagram. It will have a hard time justifying to a court why a reverse merger is necessary after giving its approval in 2012. However, hindsight is 20/20 and the digital advertising landscape has changed dramatically. Advertising dollars are going to go where people congregate; therefore it is no coincidence that Google, Amazon, and Facebook are dominant. The Facebook-Instagram combination is not even the biggest player in the market as Google commands a larger market share, while leveraging a similar relationship with YouTube to maximize its advertising footprint.
It will be difficult to show that users and advertisers have been harmed financially from the merger, even though it appears from Zuckerberg’s pre-merger comment that something anti-competitive could have been going on. Entry into the space also does not appear to be totally restricted, as Amazon may take over the Facebook-Google dominance in the next few years. Theoretically, any online company could set up an advertising platform with very little capital, or create a platform that attracts users generally, and then pivot to selling ads just like many Big Tech firms did.
FTC Chairman Joe Simons has even admitted that the longer and more enmeshed the operations of Facebook and Instagram get, the harder it will be to split up the entities.[32] For the FTC to take action, it will likely have to lean on its recently opened investigation into Big Tech acquisitions that fell below the $94 million threshold size requiring notice to the FTC.[33] Time will tell how broad Zuckerberg’s “threat” feelings towards pre-merger Instagram were shared by other Big Tech companies contemplating mergers, and how those sentiments affected competition in the digital advertising market.
[1] Online Platforms and Market Power, Part 6: Examining the Dominance of Amazon, Apple, Facebook, and Google Before the Subcomm. On Antitrust, Commercial, and Admin. Law of the H. Comm. on the Judiciary, 116th Cong. (2020).
[2] Largest companies by market cap — US Stock Market, Trading View (Sep. 21, 2020, 12:31 PM) https://www.tradingview.com/markets/stocks-usa/market-movers-large-cap/; Andrew Beatti, Why Did Microsoft Face Antitrust Charges in 1998?, Investopedia (Mar. 30, 2020) https://www.investopedia.com/ask/answers/08/microsoft-antitrust.asp.
[3] Jessica Guynn, Facebook may face FTC challenge over combining Instagram, Messenger and WhatsApp, USA Today (Dec. 12, 2019) https://www.usatoday.com/story/tech/2019/12/12/facebook-may-face-ftc-challenge-over-combining-instagram-whatsapp/4413478002/.
[4] United States v. Microsoft Corp., 253 F.3d 34, 105 (D.C.Cir.2001).
[5] 15 U.S.C. § 12-27.
[6] 15 U.S.C. § 18.
[7] United States v. Microsoft Corp., 253 F.3d 34, 105 (D.C.Cir.2001).
[8] Dept. of Justice & Fed. Trade Comm’n, Commentary on Horizontal Merger Guidelines (Mar. 2016).
[9] Id.
[10] Id.
[11] Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (Aug. 19, 2010).
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Dept. of Justice & Fed. Trade Comm’n, Commentary on Horizontal Merger Guidelines (Mar. 2016).
[23] Brad Adgate, In A First, Google Ad Revenue Expected To Drop In 2020 Despite Growing Digital Ad Market, Forbes (Jun. 22, 2020) https://www.forbes.com/sites/bradadgate/2020/06/22/in-a-first-google-ad-revenue-expected-to-drop-in-2020-despite-growing-digital-ad-market/#59751012607d.
[24] Instagram: Facebook U.S. advertising revenue share 2016-2021, Statista (June 2020), https://www.statista.com/statistics/448189/instagram-facebook-advertising-share/#:~:text=In%202019%2C%20Instagram%20accounted%20for,platform%20which%20they%20are%20able.
[25] Facebook Buys Instagram For $1 Billion, Turns Budding Rival Into Its Standalone Photo App, TechCrunch (April 9, 2012), https://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/.
[26] ‘INSTAGRAM CAN HURT US’: MARK ZUCKERBERG EMAILS OUTLINE PLAN TO NEUTRALIZE COMPETITORS, The Verge (Jul. 29, 2020), https://www.theverge.com/2020/7/29/21345723/facebook-instagram-documents-emails-mark-zuckerberg-kevin-systrom-hearing.
[27] Id.
[28] Brad Adgate, In A First, Google Ad Revenue Expected To Drop In 2020 Despite Growing Digital Ad Market, Forbes (Jun. 22, 2020), https://www.forbes.com/sites/bradadgate/2020/06/22/in-a-first-google-ad-revenue-expected-to-drop-in-2020-despite-growing-digital-ad-market/#783605f6607d.
[29] Alyson Shontell, Meet The 13 Lucky Employees And 9 Investors Behind $1 Billion Instagram, Business Insider (Apr. 10, 2012) https://www.businessinsider.com/instagram-employees-and-investors-2012-4.
[30] Facebook and Instagram Advertising Go Together Like…, Facebook (March 2016) https://www.facebook.com/business/news/facebook-and-instagram-ads.
[31] Dept. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (Aug. 19, 2010).
[32] FTC chairman says Facebook’s plan to merge brands may make it harder to split: FT, Reuters (Aug. 19, 2019) https://www.reuters.com/article/us-facebook-ftc/ftc-chairman-says-facebooks-plan-to-merge-brands-may-make-it-harder-to-split-ft-idUSKCN1V91ZE.
[33] U.S. Merger Notification Threshold Increases to $94 Million, Jones Day (Jan. 2020) https://www.jonesday.com/en/insights/2020/01/ftc-announces-2020-merger-notification-thresholds#:~:text=Annual%20increases%20in%20U.S.%20merger,effect%20on%20February%2027%2C%202020.&text=This%20week%2C%20the%20Federal%20Trade,%22HSR%22)%20Act%20thresholds.
