Yes, Facebook Is Still a Monopoly

TikTok and YouTube attract ad dollars, but they are broadcast platforms, not social networks. Their success does not undermine the antitrust case against Facebook.

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After last week’s bad earnings report from Facebook, in which Mark Zuckerberg constantly talked up competition from TikTok, several analysts made the point that the antitrust suit against Facebook is flawed. Herb Hovenkamp, who used to be the most influential antitrust thinker just a few years ago, tweeted that platforms do face competition, and thus break-ups don’t make sense.

Herbert hovenkamp @Sherman1890

I argued in the Yale Law Journal that the big digital platforms are not “winner-take-all” markets. Rather, they face competition from differentiated newcomers. Yesterday, Facebook, TikTok, and the stock market proved me correct.

papers.ssrn.comAntitrust and Platform MonopolyContrary to common belief, large digital platforms that deal directly with consumers, such as Amazon, Apple, Facebook, and Google, are not “winner-take-all” fir

Hovenkamp has been perhaps the most important advocate of the consumer welfare standard model of antitrust enforcement - Stephen Breyer used to say that lawyers would rather have “two paragraphs of [Hovenkamp’s] treatise on their side than three Courts of Appeals or four Supreme Court Justices.” Hovenkamp’s view is that the goal of antitrust is to promote efficiency, and that it is critical to embed economics into the law itself.

To that end, when he looks at a firm like Facebook, with its various subsidiaries like Instagram and WhatsApp, he sees economies of scale. And he doesn’t think that it’s even possible to unwind the acquisitions.

If Facebook decides today to buy XYZ and the government goes into court to request an injunction, that’s a pretty simple thing to do. But going after an eight-year-old merger that has been totally integrated – it’s like taking the sugar out of the iced tea. It’s not a very easy thing to do once it’s in there. You can stop somebody from putting it in the first place, but once it’s in, you really can’t take it back out again. And that’s what the government appears to be asking for.

Splitting off Instagram and WhatsApp, while perhaps not trivial, isn’t that difficult. They are separate services with a common advertising and data collection back-end. Put differently, if Zuckerberg wanted to spin off Instagram, he could easily find a way to do so.

Hovenkamp did argue that prohibiting acquisitions is a key strategy to foster more competition. And that is correct. I doubt that China would have allowed ByteDance, which is TikTok’s parent company, to sell the service to Facebook. But Hovenkamp is correct that stopping acquisitions allows for more competition and, generally speaking, for more positive economic outcomes in general. Facebook is having difficulty in buying its way into new markets because of elevated antitrust scrutiny. One consequences is that it has to focus on internal investments, such as improving virtual reality technology.

Another important critic of the suit is Ben Thompson of Stratechery, who is both extremely smart and generally a foe of antitrust enforcement (with some exceptions). He does not believe that Facebook is a monopoly or has done anything illegal to acquire market power.

Ben Thompson @benthompson

It sounds absurd to tweet it, but the FTC really is suing an American company for eliminating competition while a Chinese company is eating their lunch.

Thompson, unlike Hovenkamp, does not agree that merger policy necessarily protects competition or product differentiation. “I tend to think that acquisitions in tech are largely good for everyone, from users to startups to tech companies,” he wrote. Though Hovenkamp is a bit less clear, it seems like he and Thompson do not see Facebook as a monopoly with market power, and they do see TikTok as imposing meaningful competitive discipline on Facebook sufficient to show that the government’s case looks weak.

I’ll make four observations about why the (multiple) cases against Facebook should continue, though I’m not going to predict the outcome, since antitrust law is tilted towards the defendants but other than that tends to be pretty random. (Indeed Hovenkamp, who literally wrote the book that most judges use, already looks a bit foolish, as he predicted that the illegal nature of Facebook’s exclusivity arrangements were easier to prove, and that part of the case has already been dismissed by the judge, while the part Hovenkamp said was harder - the illegal nature of the mergers - was accepted.)

First, TikTok and Facebook compete for ad dollars, but they actually do very different things. The competition between TikTok and Facebook is similar to that between YouTube and Facebook. No one pretends that YouTube is in the same market as Facebook, even though there are overlaps. YouTube and TikTok are broadcast platforms, while Facebook is a communications platform. This piece, “Our Cancer Support Group On Facebook Is Trapped,” in which a cancer support group can’t leave FB even though their data is constantly harvested and used for targeted ads, makes the point. TikTok/YouTube aren’t a viable option for this group, because social networking is not what either broadcasting platform does. There is fluidity in communication protocols and culture, and TikTok could become a major player in communication, but so far, it hasn’t.

Second, Facebook and TikTok attract different demographics. Teenagers use TikTok, older users predominantly use Facebook. To draw an analogy, a rail line from Boston to New York doesn't compete with a rail line from Detroit to Minneapolis. Even though there are two rail lines, one line’s market power doesn’t necessarily reduce the market power of the other. It's the same thing with a service that has control over boomer attention, even if teenagers are using TikTok.

Third, it’s silly to pretend like a firm with $100B plus in advertising revenue, which is likely coming from publishers as a result of asymmetric bargaining power and data harvesting, did not do anything wrong just because there are firms like YouTube and TikTok trying to vie for adjacent advertising dollars. After all, the big ad dollars for social media are still on Facebook. “I rarely get primary inquiries about spending on TikTok or Snapchat; it’s always about Facebook and Instagram,” said Peter Stringer, a social media ad buyer.

To understand why the monopolization cases are still relevant, it helps to spell out what these suits are about. There are two major antitrust claims against Facebook. In a suit brought by the Federal Trade Commission, the government alleges that Facebook monopolized the social networking market by buying rivals Instagram and WhatsApp. In the second, a class of consumers and advertisers alleged Facebook engaged in systemic deception about the firm’s collection of data to unfairly destroy competitors, and that the firm also divided ad markets with Google, thus raising prices for advertisers. Basically, one is a merger case, and the other is a conduct case.

What’s interesting is that *both* of these theories of harm were accepted by two different judges as legitimate grounds for monopolization claims. And both judges, in a preliminary ruling, dismissed the idea that TikTok and YouTube are real competitors to Facebook. They were persuaded that Facebook can be a monopoly in the personal social networking market, and that such a market can be characterized as different than social media broadcasting. In other words, there are now multiple legal paths to show that Facebook’s durable and excessive profits are a result of illegally acquired monopoly power. And let’s not forget that this behavior has been going on for a decade, even before TikTok was created. That’s a LOT of ill-gotten loot. (All of this may change at trial, the Judge hearing the FTC case says that proving the case may be a ‘tall task.’)

Fundamentally, monopolization, as well as attempted monopolization, are criminal activities, and the gains are still illicit regardless of how the market changes in the future. A railroad can monopolize a route for decades, that trucking gets invented and disciplines the railroad’s market power doesn’t retroactively eliminate the illegal behavior.

Fourth and finally, it’s ridiculous to presume that TikTok is just a normal product whose engineers were able to easily differentiate their product from Facebook, Instagram, or WhatsApp. IByteDance, which is TikTok’s parent company, has a large and insulated market in China, and probably other forms of support from the Chinese state. Indeed, ByteDance spent more than a billion dollars on advertising on Facebook to seed itself. This is not a viable business model for anyone except a state-sponsored firm with massive financing and the willingness to cross-subsidize market entry, possibly for geopolitical reasons.

Consider the difference between how Zuckerberg treated the predecessor to TikTok, Twitter’s Vine product, that had a similar video format years earlier.

Once upon a time, America had a popular video-sharing app similar to TikTok. It was called Vine and, like TikTok, all the kids used to share silly videos on it. Facebook didn’t like the competition and flexed its monopoly power to strangle it. As revealed in leaked e-mails, Mark Zuckerberg pulled the trigger himself, denying Vine access to Facebook and eliminating its ability to access users. 

Curiously, Facebook didn’t do that with TikTok. In fact, it did the opposite. During the spring and summer of 2018, when Facebook was still pushing to access China and trying to open a subsidiary office in Hangzhou, Facebook allowed the Chinese app to blitzkrieg its site with advertising. The ad buys were so overwhelming—more than a billion dollars—that between 15 percent and 22 percent of all ads shown through Facebook on IOS during this time were TikTok ads.

In 2019, however, things changed, and it had nothing to do with patriotism or protecting the West from a Chinese app. Zuckerberg appeared to finally realize that he would never get into China, political scrutiny on Facebook’s outsized power intensified on both sides of the aisle, and TikTok stopped pouring $3 million a day into big ad buys on Facebook.

In other words, if the only way that a new platform can really launch is to first have state-sponsorship through a massive protected market, plus Facebook’s help in distributing a rival product because Facebook hoped for political favors from China, well, then that right there should be enough evidence of significant market power. Unless, that is, Thompson and Hovenkamp can prove that anyone can access infinite capital and Chinese influence if they want to enter a market.

There is one thing that I found compelling in Thompson’s observation, which is his view that Mark Zuckerberg is so competitive that he might simply ditch Facebook’s social graph to compete with TikTok. Indeed, Zuckerberg has made radical product adjustments before, though not at today’s size and scale of his firm. But if Facebook simply gets rid of its own market by trying to turn itself into a social broadcasting app, well, that would be interesting. I don’t know how that’s possible, or what happens to, say, cancer support groups who right now exist on Facebook. But it is something I’ll need to think about, if Zuckerberg does choose to abandon large swathes of his user base.

Facebook’s basic problem is that it is too big. Its various services are increasingly crappy and poorly run. Existing users are still locked in for social reasons, even if they don’t like the service, but teenagers aren’t eager to join up. If Instagram and WhatsApp were spun off, you’d probably see a lot more innovation, competition, and quality differentiation in the social networking space. If Facebook’s advertising backend were also spun off, you might even see a lot more entry of new platforms, and they wouldn’t even have to be sponsored by the Chinese government. Wouldn’t that be something?