Dark Clouds Over Facebook: The $5 Billion Settlement Isn't Finalized

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Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to discuss some quiet but potentially significant problems hanging over Facebook and the big tech ecosystem in general. The big tech story has cooled a bit as reporters increasingly focus on the Presidential race, but it will come back. I’m going to stay on it. I also have a short blurb on the cheerleading story at the end of this newsletter, I’m going to stay on that too.

Goliath-Slaying Congressman David Cicilline

Yesterday Nancy Scola at Politico wrote a piece profiling Antitrust Subcommittee Chairman David Cicilline, who is conducting an investigation into big tech corporations. It is, as Institute for Local Self-Reliance director Stacy Mitchell notes, one of the important Congressional investigations in the last forty years. Last Friday, his subcommittee held a hearing in Colorado about how Google, Amazon, Facebook, and Apple bully entrepreneurs, with witnesses from PopSockets, Sonos, Tile, and Basecamp. All of us will recognize in their stories the basic bullying at the heart of the economy right now, and the courage these entrepreneurs showed in speaking out.

This bullying is pervasive. Yesterday, I spoke before the American Booksellers Association, book store owners who have been in Amazon’s crosshairs for two decades. Book sellers are exhausted keeping their stores going in the face of Amazon’s power, but also see the political argument shifting. Cicilline is one of the key reasons why.

I talked to these small business owners about the historical analogue to today, the anti-chain store fight in the 1920s and 1930s against the A&P, which was the Amazon of its day. A&P, like Amazon, was able to use its access to capital to sell popular products below cost, and thus kill its competitors. Today, a small book store has to make a profit and sell books at the list price, whereas Amazon doesn’t have to make money and can sell that book below cost. So Amazon wins, not because its technology is good, but because it can get access to cheap money to drive its competitors out of business.

Our local stores are dying, and so are our communities. One quote, from Supreme Court Justice Louis Brandeis, captures the political problem this caused, and it has eery resonance today. Corporate monopolies, in particular chain stores, he argued, were “converting independent tradesmen into clerks” and “sapping the resources, the vigor and the hope of the smaller cities and towns.”

Cicilline is bringing back this understanding of the moral power of free commerce, and the threat concentrated finance poses. Scola’s profile of Cicilline is worth reading, but what I found fascinating (if a bit self-serving) was Cicilline’s view of the importance of history. Here he is discussing my book, Goliath: The Hundred Year War Between Monopoly and Democracy.

Giving speeches alongside Cicilline at the event were Faiz Shakir, Bernie Sanders’ presidential campaign manager; and Rohit Chopra, a Democratic Federal Trade Commission commissioner who has strongly criticized his own agency for what he sees as its inadequate approach to Silicon Valley. Cicilline called Stoller, a staunch proponent of more stringent antitrust enforcement, “an inspiration,” and thanked him for telling such an “important story.”

The fight Cicilline is helping to lead is a political struggle over what commerce means in America. In his nomination speech for the 1936 Democratic convention, Franklin Delano Roosevelt framed the politics of commerce clearly, “If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the marketplace.”

The debate is raging, and some of it is happening over the historical narrative I wrote about in Goliath. Institutional Investor magazine had a very positive review of Goliath, basically making the argument that Republicans and Democrats are beginning to see the problem of monopoly. Meanwhile, a Marxist historian writing in the pages of the left-wing magazine The Nation said I got the history all wrong, and that we need a socialist revolution.

And there we go. The history is echoing today, as it always does.

A Long Lit Fuse Under Facebook

Last July, the Federal Trade Commission and Facebook agreed on a high-profile $5 billion for various privacy violations. While that amount of money seems like a lot, the actual settlement was underwhelming. $5 billion is a parking ticket for Facebook, and the corporation got a lot in return. First, Facebook made sure that in return for the money, the FTC wouldn’t investigate Mark Zuckerberg’s emails or do an interview with him. Second, Facebook got a total release from pretty much all potential violations of the FTC’s consumer protection law, a kind of retroactive get out of jail free card.

It’s a sweet deal, and Facebook’s stock price skyrocketed when the corporation told Wall Street about it. It was a thorough embarrassment for the FTC; not a single Senator or House member praised the commission in the days after the settlement, which is a bit unusual for such a high profile case.

Now normally this would be old news, a judge usually rubber stamps these kinds of agreements and lets them go through. It’s true that a nonprofit protested; the nonprofit Electronic Privacy Information Center (EPIC) sued to stop the settlement. EPIC’s argument was that the settlement didn’t fix the problem with Facebook, and that liability release was so vague as to be against the public interest and procedurally unfair. Judges however often ignore such pleadings. But in an unusual legal scenario, the Judge who is supposed to approve the settlement hasn’t done so, and asked the government to respond by this Friday to EPIC’s arguments.

And here’s where it gets interesting. This settlement seems like it belongs to the FTC, with Chair Joe Simons being held accountable for what is basically an embarrassment. Even his DOJ counterpart, Makan Delrahim, threw shade at him, noting in one hearing that the DOJ did interview Bill Gates during the Microsoft fight in the 1990s. What few have noted, is that when the FTC tries to get civil penalties, it can’t litigate directly. It has to go through the Department of Justice. What that means is that the Attorney General, Bill Barr, is now carrying forward the FTC settlement, and it’s now his responsibility and his reputation on the line.

And such a liability release may contradict the DOJ’s own platform strategy. In December, Barr gave a speech on his approach to big tech. He argued that these tech giants pose are beyond an antitrust problem, and that the DOJ needed to consider, along with antitrust, other ways to address “privacy, transparency, consumer fraud, child exploitation, or public safety.” The DOJ has little legal authority around privacy or consumer protection on the civil side, but the FTC does. So if Barr repudiates the Facebook settlement, he can roll all of the FTC’s claims into his larger investigation. If he just goes through with the $5 billion settlement, then he is basically throwing in the towel on a good part of the Facebook problem.

So that’s problem one for Facebook. Problem two comes from a very different place.

The Ron Wyden Threat to Adtech

One character that hasn’t received enough attention in debates over big tech is Senator Ron Wyden. Wyden’s one of the smartest Senators on technology and security. He’s civil libertarian, and also a friend of large technology companies through his advocacy for the key law underpinning their business model, Section 230 of the Communications Decency Act. Recently he’s started a sort of stealth campaign to restructure the online advertising ecosystem, using an interesting mix of antitrust and cybersecurity policy.

It starts with adblocking. A little over a week ago, Wyden sent a letter to the FTC on adblocking. Most adblocking services have a problematic business model.

For years now, some of the largest tech firms have paid ad-blocking companies like Eyeo, which owns Adblock Plus, to avoid the software’s restrictions and have their ads displayed on devices. In 2015, a report from the Financial Timesshowed that companies like Microsoft, Amazon, and Google were paying out ad blockers so that they could be added to a whitelist to avoid the software’s filters.

In a letter to the Federal Trade Commission, Wyden outlined this behavior and asked Chairman Joseph Simons to open an investigation into the entire ad-blocking industry as a response. Wyden argued that any company that accepts payment to be whitelisted should be “far more transparent” about the process with its users.

Adblockers block ads delivered by small and medium size companies, but they don’t block ads by big tech companies who pay them, which is sort of a variant of payola. Big money is at stake. As Dina Srinivasan showed, Facebook made about $1B from 2016-2017 by circumventing ad blockers. Wyden wants adblockers to work and give consumers control. And this brings me to the second part of his strategy.

In 2017, Wyden sent a letter to the White House asking them to issue a binding directive to all government agencies demanding they prevent computers from malware by blocking ads with “executable computer code.” He included a pamphlet from the National Security Agency recommending that all organizations try to reduce exposure to unnecessary web content.

Now, if corporations and government agencies all choose to install adblockers to prevent malware, and if the FTC starts going after the corrupt business models of adblockers, this will create a catalytic change to the online advertising ecosystem. I’m still musing on what these changes could mean, but they will be significant.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy.

cheers,

Matt Stoller

P.S. Now I’ve been writing a lot about Bain Capital’s control of the cheerleading business through a corporation called Varsity, and I’m getting a lot of people contacting me. (And I thought politics was dirty!) The story is both broader and deeper than I realized at first, and it involves the Federal Trade Commission under Obama. I’ll be writing more on cheerleading, but for now, someone sent me a note about the cheerleading ecosystem and how much it costs for a parent.

First you buy outfits.  That’s $150-$400 a season.  Then the shoes for a season or so.  Another $100. And then you have the warmups. At least those last a couple years, but all the clothes are garbage. But then you have the competitions.  That’s $50-$100 just to go, plus a fortune for a soda there or something. But then you have to stay at the hotel, which is always more expensive than you can find at a comparable hotel nearby—or the girls can’t compete. By the time you’re done, you can be out $5k or more for the year. And that assumes you’ve raised a bunch of money by organizing and hosting bingo nights, purse bashes, and other events that take up a ton of time. Nobody has money. So we’re all just trying to do this for the girls.