By Jon Swartz
A consortium of 48 attorneys general and the U.S. government filed antitrust lawsuits against Facebook Inc. on Wednesday, claiming it committed unlawful, anticompetitive acts that put rivals out of business and cemented its status as the pre-eminent social-networking giant.
The states’ suit , spearheaded by New York Attorney General Letitia James, focuses on Facebook’s /zigman2/quotes/205064656/composite FB -0.29% acquisitions of photo-sharing app Instagram and messaging service WhatsApp, and their role in turbocharging Facebook’s market dominance. The suit could force Facebook to divest some of those business, and to inform state AGs of significant merger and acquisition activity of more than $10 million.
“For nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition, all at the expense of everyday users,” James said during a 20-minute press conference Wednesday announcing the charges. The attorneys general of 46 states, as well as the District of Columbia and Guam, were named in the suit, while Alabama, Georgia, South Carolina and South Dakota did not participate.
The states are coordinating their lawsuit with the Federal Trade Commission, which filed separately on Wednesday, accusing Facebook of “illegal monopolization” and specifically calling for the “unwinding” of its acquisitions of Instagram and WhatsApp .
The FTC set its sights on Facebook after concluding an investigation into the company’s entanglement with Cambridge Analytica, the notorious political consulting firm, that forced the tech giant to pay a $5 billion penalty.
“Personal social networking is central to the lives of millions of Americans,” Ian Conner, director of the FTC’s Bureau of Competition, said in a statement. “Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition. Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive.”
Rep. David Cicilline, D-R.I., chairman of a House subcommittee on antitrust matters, promptly praised the lawsuits. “Facebook has broken the law,” he said in a statement. “It must be broken up. I applaud the FTC and state attorneys general who are leading this effort today. This marks a major step in our ongoing work to bring the tech industry’s monopoly moment to an end.”
“This is revisionist history,” Facebook General Counsel Jennifer Newstead said in a sharply worded rebuke. “Antitrust laws exist to protect consumers and promote innovation, not to punish successful businesses. Instagram and WhatsApp became the incredible products they are today because Facebook invested billions of dollars, and years of innovation and expertise, to develop new features and better experiences for the millions who enjoy those products.”
“The most important fact in this case, which the Commission does not mention in its 53-page complaint, is that it cleared these acquisitions years ago,” Newstead continued. “The government now wants a do-over, sending a chilling warning to American business that no sale is ever final.”
Indeed, it will be difficulty for the government to explain how actions that Facebook took six to eight years ago are continuing to harm competition today, says Notre Dame Law School Professor Stephen Yelderman, a former trial attorney in the U.S. Department of Justice Antitrust Division. “Reading the complaint, it’s hard to avoid the sense that the FTC is fighting a few wars back,” Yelderman said.
Facebook has mounted a two-pronged strategy in fending off antitrust charges. It has plowed resources into a lobbying effort while Facebook Chief Executive Mark Zuckerberg argues the purchases of Instagram and WhatsApp helped make it competitive in a market where upstarts such as TikTok flourish.
Since Facebook acquired Instagram for $1 billion in 2012 and WhatsApp for $19 billion in 2014, both have played crucial roles in the unbridled growth of Facebook. Instagram is expected to rake in $22.46 billion in U.S. ad revenue in 2021 — more than half of Facebook’s total U.S. haul, according to eMarketer. (Facebook is expected to report $84.1 billion in fiscal 2020 revenue, based on projections by FactSet.)
The double-whammy legal action against Facebook is the second government legal action against one of tech’s biggest names. In October, the Justice Department sued Alphabet Inc.’s /zigman2/quotes/202490156/composite GOOGL -1.15% /zigman2/quotes/205453964/composite GOOG -1.36% Google for the market power wielded by its search-engine business; 11 states signed on to that suit.
Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.21% and Apple Inc. /zigman2/quotes/202934861/composite AAPL -1.32% are also under regulatory scrutiny, and could face actions next year, say antitrust experts.
Shares of Facebook closed down about 2%. The stock is up more than 34% in 2020, as the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.02% has gained 14.6%.
Facebook has been bracing for legal actions while remaining open to regulation. Indeed, the company in recent months has accelerated the integration of Instagram into its core platform in anticipation of calls to break off the photo- and video-sharing service.
“Facebook’s move to unify the technical infrastructure for Facebook, WhatsApp and Instagram could make a breakup harder,” says Sumit Sharma, senior researcher for tech competition at Consumer Reports. “But we must have remedies that allow different business models and more diverse innovation to thrive. We hope this lawsuit kick-starts this process.”
Public-relations fallout from state and federal suits and the threat of others — compounded with bipartisan criticism of how Facebook handles content on its platform — is likely to further tarnish the company’s brand name, legal and marketing experts have told MarketWatch.
“It is now widely known that Facebook is an unethical and out-of-control corporation,” says Jennifer Grygiel, a communications professor at Syracuse University’s Newhouse School. “This is evident given that there is almost unanimous consent amongst state attorneys general.”
The sweep of the state and federal suits marks the “single biggest antitrust development in 40 years,” Will Rinehart, senior research fellow at the Center for Growth and Opportunity at Utah State University, told MarketWatch. “If you look at the general disregard for social media — namely, Cambridge Analytica — it has centered on Facebook.”
The dual cases are equally significant in “whether the courts are still willing to take seriously divestiture as a remedy,” Mark R. Patterson, a professor at Fordham Law School, told MarketWatch. “Given the increasing size of many firms in the market, that could have broader effects.”