Facebook Hits $1 Trillion in Market Value, Beats Gov't Antitrust Rap (for Now)

With a muddled decision, a judge just instructed Congress on why antitrust law needs to be rewritten. The FTC will likely refile its antitrust case against Facebook and move forward.


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, a judge dismissed two government antitrust suits against Facebook, though he said one can be refiled shortly. While this decision more of a speed bump than a catastrophe, it does show how badly antitrust law has been warped. I’m going to discuss what happened and why, as well as the road ahead.

A Doctor Evil Movie? Here's What Mike Myers Says About An Austin Powers  Spinoff - CINEMABLEND

One TRILLION Dollars!

Last week, the House Judiciary Committee approved a number of bills to address the power of big tech, as well as several general purpose antitrust bills. The vote total on the bill to break up big tech was narrow, and it’s hard to see what could create more pressure to get a break-up bill through Congress without some sort of outside precipitating event. As it turns out, such an event was just a few days away.

Today, Judge James Boasberg, an Obama-appointed district judge, dismissed the Federal Trade Commission’s complaint against Facebook, as well as a separate complaint filed by the by the state attorneys general led by New York’s Tish James. As if to offer a Dr. Evil-style metaphor on the event, Wall Street immediately bid up Facebook’s market capitalization to just above one trillion dollars.

The Congressional reaction was swift. Here’s Republican Ken Buck, agreeing with Democrat Amy Klobuchar on the the decision.

So what exactly happened, and why?

The Warped Core of Antitrust Law

When the FTC filed its case, it made several allegations about Facebook’s monopoly power. First, the FTC alleged that Facebook acquired Instagram and WhatsApp to maintain its monopoly in social networking. In making this case, the commission quoted Mark Zuckerberg’s own email saying “it is better to buy than compete.”

Second, it said that Facebook foreclosed rivals by blocking them from its essential service, refusing, for example, Vine, from being able to use Facebook’s platform APIs, merely to stop a rival from gaining market share.

The dismissal is humiliating for enforcers, and the headlines certainly are good for Facebook. Here’s the New York Times, for example.

That said, I’m not sure panic is warranted. I talked to a bunch of smart lawyers, and I’m told that what matters about today’s decision are four things. First, the judge dismissed the way the FTC characterized the market, which sounds bad, but isn’t that big a deal. In his dismissal, moreover, the judge told the FTC how to fix its complaint, which it can do by refiling in 30 days with more market share data. (As antitrust scholar Daniel Crane notes, the FTC will almost certainly refile.) That’s a huge loss for Facebook, since market definition is perhaps the most important legal battlefield and the judge will probably come to accept the government’s framework.

Second, the judge said the FTC’s biggest claim - that Facebook’s acquisition of Instagram and WhatsApp were done to foster monopoly - can go forward. That’s another big loss for Facebook. Third, he tossed the FTC’s allegations of anti-competitive conduct, saying that Facebook as a monopoly is allowed to crush anyone it wants. That’s a loss for the government. And fourth, he also dismissed the state AG cases entirely on the doctrine of ‘laches,’ a bureaucratic limit which will constrain state antitrust action going forward (unless Congress fixes it). Another loss.

In other words, the dismissal is more of a detour than an end to the case, with some good signs, and some bad ones. To understand the impact of the decision, it’s important to dwell a bit on what the judge said. Boasberg’s dismissal of the case wasn’t just a decision that Facebook’s arguments were better than those of the government, but that the case was so ridiculous that there was simply no plausible way the FTC or the states could win at trial.

Why did the judge rule as such, given that it’s fairly evident Facebook has market power? Boasberg’s objection was to how the FTC framed the social networking market. Last week I noted that Congress in its break up big tech legislation didn’t proscribe exactly what a line of business is, and that this legal vagueness is a significant problem. Today the judge ruled that because the FTC didn’t really give a completely clear definition of Facebook’s product, the FTC did not prove that Facebook is a monopoly or is exercising market power.

Here’s what he said.

The exact metes and bounds of what even constitutes a [personal social networking] service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear. In this unusual context, the FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague “60%-plus” assertion too speculative and conclusory to go forward.

Boasberg observed that in its complaint, the FTC couldn’t identify any direct Facebook competitors. How then, he asked, could Facebook have only 60+% share of a market? Who has the other 40%? In other words, the government couldn’t find a competitor in social media so therefore it can’t go forward with this complaint about a monopoly.

While that seems to indicate dissatisfaction with market definition, I suspect Boasberg was just annoyed that the FTC didn’t seem to show very much work in its analysis of market power, merely presenting a 60% market share number. “It is almost as if,” he wrote in irritation, “the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist.” Still, the judge noted that Facebook is a dominant cultural force. He wrote, “After all, no one who hears the title of the 2010 film ‘The Social Network’ wonders which company it is about. And he put in a cutesy sentence in describing Instagram, “Begin with Insta, as those in the know — viz., our children — refer to it.”

In other words, this is a snobby judge saying “Yes I know it’s a monopoly, it’s Facebook. But show me some friggin’ respect.”

The FTC could have used direct evidence to show market power. It could have noted that Facebook has been sticking more ads into the newsfeed, which is an analogue to a price hike for consumers. It could have showed reduced privacy as a similar analogue, or worse and worse content, or ad boycotts failing to affect the firm’s revenue. And it could have presented better evidence on market shares. But it didn’t. The commission expected the judge would use common sense. Instead, this judge was irritated that the commission didn’t prove beyond a shadow of a doubt that the firm is a monopoly.

That said, everyone knows Facebook is a firm with significant market power. Here’s Senator Mike Lee last week at an event in which he defended the antitrust status quo, "The idea that Big Tech operates in a functioning free market can no longer be taken as a serious position." Lee is the most ardent defender of the antitrust status quo, with one of his staffers telling the Washington Monthly, “Our view is that antitrust law is not fundamentally broken.” So if Lee is saying, de facto, yes Facebook is a monopoly, then there’s consensus. And yet, if a judge won’t even let a jury hear the case because he finds the notion of Facebook having market power so flimsy, even if it’s purely due to pique, well, Houston, we have a problem with antitrust law.

Consumer Welfare Means Monopolists Win

On the particular claim of market definition, Boasberg says the FTC can refile its complaint and fix the market definition issue. And he ruled that the Sherman Act does allow the FTC to challenge the acquisitions of Instagram and WhatsApp, which is huge. It means that retroactive look-backs at mergers that should have been blocked are doable across the economy.

That said, Boasberg ruled very badly on the rest of the complaint. On the interoperability claim, he said that it simply is not an antitrust violation to cut off access to an open platform with the goal of killing a competitor. To review the conduct the judge asserted was perfectly legal, here’s an email correspondence of how Mark Zuckerberg reacted to Vine when it tried to build on top of Facebook’s platform, which Facebook had marketed as an open platform to developers.

“Twitter launched Vine today, which lets you shoot multiple short video segments to make one single, 6-second video,” Osofsky wrote. “Unless anyone raises objections, we will shut down their friends API access today.”

“Yup, go for it,” replied Zuckerberg, according to the documents.

Vine wasn’t the only victim, but it was the most prominent one, since Vine was owned by Facebook’s then-high profile competitor, Twitter. The FTC argued this kind of action was just one of a set of Facebook’s anti-competitive conditions on software developers - like explicit contractual rules that developers not compete with Facebook. These kinds of constraints, the commission said, helped Facebook maintain its monopoly power.

The judge disagreed, not so much on whether the behavior helped facilitate Facebook’s monopoly, but on whether doing so was illegal. Citing a list of Supreme Court and circuit court precedents, the judge said that monopolists have the right to deny access to their services to anyone they choose, even if their goal is to kill competition. Monopolists, he said, are allowed to monopolize. That’s a weird assertion, but it’s backed by Supreme Court precedent (even if Boasberg interpreted case law very narrowly).

Why is antitrust organized this way? The answer, and this gets to the ideological problem with how we do antitrust, is that the consumer welfare standard of antitrust lays out a framework that mandates it. The term consumer welfare is confusing, because though it has the word ‘consumer’ in it, the standard itself is really about interpreting antitrust law through a certain economic theory about what is and is not efficient, rather than about questions of market power or coercive behavior.

To judge whether to something ‘harms’ consumer welfare, you have to start from the premise that if a monopolist is doing something, it is likely because the executives who run that firm think that it will improve operational competence, not because they are trying to exploit bargaining power. This higher efficiency presumably will then be passed to consumers through lower prices, but the point is the efficiency. (Yes, this is insane, I’m explaining, not endorsing.) In this framework, any interference with the whims of the monopolist are likely to be highly destructive, and so you need a very high bar to prove an antitrust violation.

You might think I’m exaggerating, but in this particular case, the judge argued that forcing Mark Zuckerberg to stop using his monopoly power to crush his rivals would be bad, because Facebook “might be deterred from investing, innovating, or expanding.” And that, he says, would “hinder, rather than advance, consumer welfare.” This is utterly backwards logic - Facebook’s product is increasingly bad, stuffed full of ads and spyware, because it has no competition. But the judge said, hey, the monopoly is a feature, not a bug.

Still, this decision is helpful in some ways, as it illustrates that the consumer welfare standard of antitrust law is nothing more than a pro-monopoly philosophy.

Lessons and the Path Ahead

Moving forward, this case presents a legal challenge for new FTC Chair Lina Khan, who will be directing the commission towards a different path. One possibility, which the judge previewed, is to have the FTC bring the case using its broader authority to enforce fair market behavior, what is known as Section 5 of the FTC Act. Khan is already set to resurrect that dormant power next week, at the commission’s first open hearing. A more plain vanilla approach would be to simply refile the case by fixing the market definition issues.

This Facebook case isn’t the only challenge for Khan. Amazon said a few weeks ago that it was buying movie studio MGM, and today the ecommerce giant announced the acquisition of secure messaging app Wickr (with the ominously reported phrase “Schmidt says AWS will be offering Wickr services effective immediately. Current Wickr users shouldn’t see significant changes for the time being.”) The FTC will oversee both acquisitions, and while Khan is known as a scholar with an in-depth knowledge of the antitrust implications of Amazon’s behavior, she also knows that these acquisitions aren’t necessarily easy to challenge.

Taking a broader perspective, it’s evident that Congress needs to step in and rewrite antitrust laws across the board. That’s not so much to change the law as to bring it back to where it was before 40 years of case law turned judges into pro-monopoly advocates. These rewrites should be specific about terminology and definitions. My critique of the bills passed last week is that they are written too vaguely, and that judges will interpret them in ways favorable to monopolists. I’m happy that Judge Boasberg decided to validate my observation with this opinion.

Finally, both sides need to start making sure that their judicial appointees know something about market power. While conservative judges are generally pretty bad on antitrust, so are liberal ones. In fact, I appreciate that Boasberg is a Democrat, so we can dispense with the standard whiny schlock from center-left enforcer-types that it’s just the big mean Republican judges at fault. For too long, antitrust has been an after-thought for judicial nominations. This decision, while not terrible, doesn’t speak well of the clarity of thought by judges.

But it is clarifying for the rest of us.

Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.


Matt Stoller