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US antitrust action could force Facebook to divest Instagram and WhatsApp

Image credit: REUTERS/Dado Ruvic/Illustration

Facebook is facing what may be its greatest legal battle yet, with the Federal Trade Commission (FTC) and nearly every US state separately filing antitrust lawsuits against the company.

The competition watchdog has accused Facebook of engaging in a “bury or buy” strategy to eliminate competition, including by purchasing growing rivals Instagram (acquired in 2012 for $1bn) and WhatsApp (acquired in 2014 for $19bn).

During a press conference, New York State Attorney General Letitia James echoed the FTC’s criticisms, accusing Facebook of using its market dominance to “crush smaller rivals and snuff out competition, all at the expense of everyday users”. She said that Facebook has a habit of opening its site to third-party apps, then abruptly cutting off their developers when they became a threat. Its vast market dominance allows it to harvest user data and reap enormous advertising revenues.

“It’s really critically important that we block this predatory acquisition of companies and that we restore confidence to the market,” James said.

New York is joined by 45 other states, Guam, and the District of Columbia. Only Alabama, Georgia, South Carolina and South Dakota did not participate. The coalition of states and districts collaborated with the FTC, but conducted a separate investigation into Facebook.

“For years, Facebook has used its monopoly power as a social-networking website to stifle competition and innovation and to sell alarming amounts of user data to make money, all at the expense of the many people who use its platform,” said North Carolina Attorney General Josh Stein, in a statement.

Facebook’s position may be compromised by damning comments made by senior executives, including a 2008 email from CEO Mark Zuckerberg which said that “it is better to buy than compete” with rivals.

The lawsuit could force Facebook to divest of its subsidiaries Instagram and WhatsApp. This would reverse the FTC’s previous decision to permit the acquisitions, and would likely spark a years-long legal battle.

Facebook had promised that these companies would be run independently from the main Facebook service while benefitting from Facebook’s expertise and resources, although the three have become increasingly interlinked. Most recently, the Instagram and WhatsApp chat functions have been linked with Facebook Messenger. The founders of Instagram and WhatsApp have left Facebook amid disagreements with Zuckerberg.

Facebook general counsel Jennifer Newstead criticised the lawsuits as “revisionist history”. She said that Instagram and WhatsApp have succeeded due to Facebook’s investments, to the benefit of consumers.

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

The FTC’s legal action against Facebook follows a similar case brought against Google by the US Department of Justice in October. The department has accused Google of wielding its market power to deflect competitors. These are the biggest antitrust cases since the lawsuit brought against Microsoft in 1998, which resulted in a years-long court battle and a settlement.

Seth Bloom of Bloom Strategic Counsel told Reuters that this antitrust case is weaker than the case against Google: “We’re talking about acquisitions that are six or eight years old and it will be difficult for a court to order divestitures of many years ago.”

This week, the UK’s competition watchdog laid out a proposed regulatory regime for tech giants like Facebook and Google. The proposals include enhanced merger rules, allowing the regulator to suspend acquisitions in order to carry out investigations into potential harm to consumers.

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