Dealing with Data-opolies
When companies exert too much power over the marketplace, governments will step in to ensure fairness to consumers. This has happened to utilities, telecommunications, and now it may happen with social media companies.
On August 22, 2012, the Federal Trade Commission (“FTC”) announced that it had “closed its investigation of Facebook’s proposed acquisition of Instagram, [and that] the deal may proceed as proposed.” (Federal Trade Commission). Now, the FTC is second-guessing its blessing of Facebook’s major acquisitions, Instagram and WhatsApp, and is gearing up to file an antitrust lawsuit against Facebook. (Kendall et. al., Wall Street Journal). Facebook’s previously unchecked acquisition practices have sparked inquiry into whether Facebook is purchasing startups to keep them from competing with the Company. Id. Facebook has acquired an astounding amount of businesses, roughly 90 companies over the past 15 years. Id. If the FTC concludes that the Company is engaging in practices that reduce competition, Facebook could face severe repercussions, ranging from required divestitures to reduced ability to fully integrate its acquisitions. (Jamshed & Akins, S&P Global Market Intelligence).
Matt Perault, Facebook’s Director of Public Policy, responded to the government’s recent inquiries, claiming Facebook’s acquisitions have fueled innovation and created opportunities the target companies would not have had on their own. (Seetharaman et. al., Wall Street Journal). Facebook’s counsel, Sidley Austin LLP, has already responded to the FTC’s actions detailing how Facebook would defend itself against antitrust claims and that an ordered breakup of the company would “defy established law, harm consumers, and cost billions of dollars.” (Horowitz, Wall Street Journal). Facebook is willing to accept more oversight from lawmakers in Washington but says decoupling a successful American company would be a step too far. (Statt, The Verge).
In 2014, Vice President of Corporate Development, Amin Zoufonoun, described the company’s acquisition strategy, “[Facebook] doesn’t make deals with the aim of boosting its EPS (earnings per share), we look to fill voids in our offerings.” (Gelles, New York Times). Zoufonoun further explained that Facebook does not target established Internet brands but uses acquisitions to make bets on the future and plug technical holes. Id. As an example, Facebook’s $2 billion acquisition of Oculus VR in 2014 had nothing to do with improving the social network’s main site or increasing sales. Id. It was a bet that virtual reality would emerge as a new operating system. Id. Insight into Facebook’s acquisition strategy is also found in the Company’s 10-K, a mandatory annual report required by federal securities laws. (U.S. Securities and Exchange Commission, Investor.gov). In Facebook’s most recent 10-K filing, the company explicitly addresses that competition is a serious threat to its business. (Facebook, Inc., SEC.GOV). The Company further reports that “several businesses it purchased via acquisition were not material to its financial statements, either individually or in the aggregate.” Id. These statements may incite questions concerning the Company’s motivation for various acquisitions.
Ironically, Facebook is dealing with its own monopolistic issues. Although you may not read about it on Facebook, the Company’s infamous Chief Executive, Mark Zuckerberg, continues to make headlines. Zuckerberg has an incredible amount of power. Holding 53.3% of Facebook’s votes, Zuckerberg “has control over key decision making”—ultimately controlling the business. (Facebook, Inc., SEC.GOV). Voicing his concerns with Zuckerberg’s “unchecked power,” Chris Hughes, Facebook’s co-founder, describes Zuckerberg’s influence as “beyond that of anyone in the private sector or government.” (Hughes, New York Times). Hughes elaborates, “Mark alone can decide how to configure Facebook’s algorithms, which determines what people see in their News Feeds . . . [h]e sets the rules for how to distinguish incendiary speech from merely offensive, and he can choose to shut down a competitor by acquiring, blocking, or copying it.” Id. Hughes urges the government to hold Zuckerberg accountable to ensure Americans are protected and markets are competitive. Id.
The internal control concentration at Facebook highlights the importance of the FTC’s investigation. Additionally, some argue current antitrust laws are ill-equipped to address digital platform competition. (Ceccio & Mufarrige, The Journal of the Antitrust, California Lawyers Association). Today’s tech monopolies are very different from the companies who ushered in the antitrust movement (Standard Oil and U.S. Steel, see Footnote), and thus may require different regulation. (Stucke & Ezrachi, Harvard Business Review). Much of the antitrust precedent relies on the Consumer Welfare Standard, which requires the government to show that a merger will result in increased prices to consumers. (Patel, The Verge). However, this standard is unworkable for many tech companies because it is impossible to show a price increase when services, such as Facebook, are free. Id.
Facebook is not an isolated incident. The top five tech firms – Alphabet, Amazon, Apple, Facebook, and Microsoft – have made more than 400 acquisitions over the last decade. (McKinnon & Seetharaman, Wall Street Journal; Kendall et. al., Wall Street Journal). Tim Wu, a professor at Columbia Law School and contributing author for the New York Times, voiced his concern about the “chilling effect on innovation” Facebook and other tech giants create when they buy up every promising startup. (Patel, The Verge). Because it is seemingly impossible to displace industry giants, entrepreneurs have shifted focus from disrupting the marketplace to being bought out. Id. Whether the FTC intends to pursue action against Facebook should be revealed soon. (Kendall et. al., Wall Street Journal). Will the FTC draw a line in the sand and force the Silicon Valley giants to build versus buy? And if so, will consumers be better off? The impacts of the FTC’s decision will be far-reaching, altering the future of the tech M&A landscape.
Footnote
U.S. Steel and Standard Oil were monopolies who became famous for controlling entire sections of the economy and their prices. (Stucke, Ezrachi, Harvard Business Review).