Tim Wu Makes a Case for Breaking Up Facebook and Instagram

By TAP Staff Blogger

Posted on October 15, 2018


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Just why is Facebook in control of Instagram, its greatest natural competitor, in the first place? Isn’t antitrust law supposed to stop companies from buying off their rivals to achieve market dominance? The answer is that we — the Obama administration’s antitrust enforcers — blew it. Our standards for assessing mergers, fixated on consumer prices, were a poor match for the tech economy and are effectively obsolete.
  - from “The Case for Breaking Up Facebook and Instagram” by Columbia law professor Tim Wu (The Washington Post, September 28, 2018)

 

In an op-ed piece written for The Washington Post, Columbia law professor Tim Wu explains why the Federal Trade Commission’s (FTC) process for evaluating corporate mergers is ill-equipped to assess potential harm to consumers within the technology industry.

 

The Case for Breaking Up Facebook and Instagram” provides an overview of Facebook’s acquisition of Instagram and the FTC procedures used in 2012 at the time of the merger. Professor Wu encourages the government to ‘unwind’ or break up the social media behemoth in order to insert “competition as an answer to that kind of [Facebook’s] unchecked private power.”

 

Below are a few excerpts from “The Case for Breaking Up Facebook and Instagram.”

 

Facebook’s Acquisition of Instagram

 

What made Instagram especially dangerous to Facebook was that it was strong where Facebook was weak. Instagram was native to mobile; Facebook was struggling on that platform. And photo sharing was incredibly fast and easy on Instagram. … In short, Instagram threatened to do to Facebook what Facebook did to MySpace in the early 2000s — rob it of the young and restless who do so much to drive the future.

 

Facebook could have risen to the challenge by improving its product. Instead, it bought its competitor and eliminated the threat.

 

When a firm attempts to buy a competitor, especially a fast-growing and innovative challenger like Instagram — alarm bells are supposed to ring in Washington, D.C. Ever since Standard Oil became an oil-refining monopoly by acquiring all of its rivals in the 1870s, the federal government has regarded the building of market power through acquisitions with deep suspicion. Yet the Federal Trade Commission approved the merger without conditions. And this was no one-time lapse: The commission would soon allow Facebook to buy WhatsApp, another dangerous competitor.

 

What happened? In retrospect, the agencies did not have the tools to understand the markets or the stakes. That’s because, over the last 30 years, the merger review process has become narrowly focused on whether consumer prices might rise following a merger. The process involves teams of economists making predictions about those prices. The approach has its flaws even in traditional markets, but in the tech industry it’s a non-starter.

 

In the case of Facebook and Instagram, the agencies confronted two firms that did not charge users, instead competing chiefly for time and attention. As Instagram hadn’t begun to sell ads, the antitrust agencies were unable to see a problem. The British competition office even went so far as to publicly assert that the companies were not competitors at all. It takes many years of training to reach a conclusion this absurd.

 

Reverse the Merger

 

But it’s not too late to reverse the merger. While it is not typical practice, the government is free to undo a consummated merger that violates the law, especially when there is reason to suspect regulators didn’t understand the markets well enough at the time of the actual merger. (A prominent example was the 2010 unwinding of Whole Foods’s 2007 acquisition of the Wild Oats brand and stores.) In fact, the Supreme Court has approved breakups as long as 40 years after the original merger.

 

Evaluating Mergers Within the Tech Industry

 

Establishing better standards for the review of tech platform mergers means supplementing economic analysis, not abandoning it. It means assessing competition in attention markets in fresh ways: In such markets, as economist David Evans argues, the relevant metric is user time, not price.

 

Regulators also ought to make reasonable predictions as to whether firms may become future competitors, even if they are not present competitors — a doctrine largely neglected since the 1980s. Finally, enforcers need to be highly sensitive to the elimination of “mavericks” — firms like Instagram poised to pose an existential challenge to the incumbent.

 

Analysis along these lines would have led U.S. and European enforcers to block the merger, allowing Instagram to emerge as Facebook’s principal competitor, promoting the process of competition as intended by the antitrust law.

 

Read the full article: “The Case for Breaking Up Facebook and Instagram.”

 

 

Tim Wu is the Julius Silver professor of law, science and technology at Columbia University and the author of "The Curse of Bigness: Antitrust in the New Gilded Age." He was previously a senior adviser at the Federal Trade Commission.

 


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