On December 9, 2020, the US Federal Trade Commission (FTC) filed. A lawsuit against Facebook , stating a number of demands, incl. On the alienation of Instagram and WhatsApp.
The position of the FTC is interesting and revealing, because illustrates a number of disturbing global trends of our time.
Among them is the growth in power (economic, political) of digital giants and the associated movement towards abandoning the fundamental principle of competition law:
dominance in itself, in the absence of abuse of it, is not a violation of antitrust laws.
Where are the origins of these trends? What are the FTC‘s arguments? Is it possible to consider her approach promising from the point of view of public welfare? Why is legal liability holding back the growth of social media? What is their responsibility in the US and Russia?
Plan (part 2)
4. Merging Facebook, Instagram, WhatsApp.
4.1. positive network effects.
4.2. The principle of good faith.
4.3. Stability of civil circulation.
4.4. Negative network effects.
4. Merging Facebook, Instagram, WhatsApp
4.1. Positive network effects
The FTC pays great attention to the network effects and switching costs that exist in the market for personal social networks (and in general any infrastructure services, i.e. those that provide interaction between consumers) and create prerequisites for its monopolization.
Facebook’s dominant position in the US personal social networking market is durable. Due to significant entry barriers, including direct network effects and high switching costs. Direct network effects refer to user-to-user effects that make a personal social network more valuable as more users join the service. Direct network effects are a significant barrier to entry into personal social networking. Specifically, because a core purpose of personal social networking is to connect and engage with personal connections, it is very difficult for a new entrant to displace an established personal social network in which users’ friends and family already participate…
A entrant in personal social networking services would also have to overcome potential users’ reluctance to incur high switching costs. Over time, users of a personal social network build more connections. And develop a history of posts and shared experiences. Which they would lose by switching to another personal social networking provider. Further, these switching costs can increase over time—a form of a “ratchet effect”—as each user’s. Collection of content and connections, and investment of effort in building each, continually builds with use of the service.
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social media marketFacebook’s dominance in the US personal social media market is robust. Due to significant entry barriers, including direct network effects and high switching costs. Direct network effects refer to user-to-user interaction effects that increase the value of a personal social network as more users join the service. Direct network effects are a major barrier to entry into the personal social media market. In particular, since the main purpose of personal social networks is to establish and interact with personal connections, it is very difficult for a beginner to replace the existing personal social network where friends and family of users already participate … A potential entrant in the personal social media market will also have to overcome user reluctance to incur high switching costs. Over time, personal social network users make more connections and develop a history of messages and sharing experiences that they will lose by switching to a different personal social network provider. In addition, these switching costs can increase over time – a form of “ratchet effect” – as each user’s set of content and connections, and the effort invested in creating each of them, is constantly growing with the use of the service. |
M. Zuckerberg’s
The FTC also provides a fragment of M. Zuckerberg’s correspondence. It appears that the founder of Facebook initiated the acquisition of Instagram (and subsequently WhatsApp) with network effects in mind and the desire to use them to monopolize the market:
| One thing that may make [neutralizing a potential competitor] more reasonable here is that there are network effects…Once someone wins at a specific mechanic, it’s difficult for others to supplant them without doing something different…Even if some new competitors spring up, buying Instagram, Path, Foursquare, etc now will give us a year or more…new products won’t get much traction since we’ll already have their mechanics deployed at scale. | One thing that might make [neutralizing a potential competitor] smarter is that there are network effects… When one wins on certain mechanics, it’s hard for others to edge them out without doing something else… Even if some new competitors will come in, buying Instagram , Path , Foursquare etc now will give us a year or more… new products won’t get much success as we already have their mechanisms deployed on a large scale. |
FTC intends to create a judicial precedent
Thus, the FTC intends to create a judicial precedent; a general rule against mergers and acquisitions in markets with network effects for dominant companies , regardless of the share of the merged company, but possibly taking into account the cost of the transaction.
However, the FTC does not appear to insist that the ban should be absolute. Rather, it is about establishing a rebuttable presumption of restriction of competition by such mergers, with the dominant right to prove their admissibility.
Such an initiative can be generally assessed positively (if the intention of the FTC is really like that).
Still, the FTC is proposing a retrospective ban on the merger by ordering Facebook to sell the previously acquired Instagram and/or WhatsApp assets. Such an initiative cannot be assessed unambiguously for the following reasons.
4.2. The principle of good faith
The FTC’s arguments are contrary to the general legal principle of good faith.
So, if we consider the arguments of the FTC with the so-called. Russian antimonopoly legislation , then the following will turn out.
Facebook is accused of abusing its dominant position by preventing other business entities from entering the personal social media market, i.e. acquisition of assets of real and (or) potential competitors ( clause 9, part 1, article 10 of the Law on Protection of Competition).
Protection of Competition
In addition, Facebook is charged with calling other business entities unfavorable and anti-competitive conditions for access to the API ( part 5 of article 10 , part 2 of article 11 of the Law on Protection of Competition).
It turns out – three violations, which may correspond to the concept of “systematic implementation of monopolistic activities” ( clause 11, article 4 of the Law on Protection of Competition).
The consequence is the possibility of a forced division of Facebook at the suit of the antimonopoly authority ( Article 38 of the Law on Protection of Competition).
However, such logic has a legal flaw, because. denies an important competitive law principle, namely the principle of good faith. One of its corollaries is the public good faith rule. If a person’s good faith is publicly established by the state, then it is assumed.
merger of companies
So, if the antimonopoly authority approved the merger of companies. It actually confirmed the legality of the actions of all participants in the latter, incl. conscientiousness. This means that any actions taken in connection with this merger cannot be recognized as illegal, i.e. violating antimonopoly prohibitions, except as otherwise expressly provided by law.
It turns out that instead of the three violations required by paragraph 11 of Article 4 of the Law on Protection of Competition, only one remains; both mergers previously approved by the competition authority are removed from the list of violations.
It seems that this principle becomes especially important in the conditions of the modern economy. After all, the merger of digital companies in itself is like creating barriers to the entry of real or potential competitors into markets with network effects.
So, if the competition authority has previously approved a merger, it cannot subsequently determine this merger as an abuse of dominance or monopolistic activity.
concept of a dominant position
US federal law does not know the concept of a dominant position, as well as its abuse, but the concepts of monopoly, monopolization are used there.
The US Code (USC) contains a number of special rules governing relations in the field of economic concentration control, primarily 15 USC § 18 – 19.
Some USC rules are devoted to certain types of monopolization (for example, the creation of discriminatory conditions). At the same time, 15 USC § 45 (a) contains a rule that combines many unnamed antitrust violations. The FTC accuses Facebook of violating this rule.
| Unfair methods of competition in or affecting commerce. And unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful. | Unfair competitive practices in a trade or related business, and unfair or misleading acts or practices in a trade or trade-related business are declared illegal. |
It is noteworthy that this norm was conceived by the US Congress as “rubber“.
Share of resources
It is a ubiquitous management mantra that customer retention is much cheaper than customer acquisition. A measly 5% customer retention equates to an increase in profit of 25%! So who should get the lion’s share of resources while building a company? Customer support, of course!
More people are using social media from the last couple of years. They are scrolling more often, discovering brands, shopping, and interacting with them at the same time. Businesses that failed to switch online, especially to social media, slowly became irrelevant during the pandemic.
The most popular social networks Facebook, WhatsApp, and Instagram have rolled out features to support businesses conduct and interact with users on the platforms. But, how are they different? What is the difference in offering customer support on these three networks? WhatsApp vs Facebook vs Instagram – Let’s settle the debate.
