Facebook could be forced by the U.S. to sell Instagram and WhatsApp
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Facebook is going to be spending a lot of time in court after the U.S. Federal Trade Commission (FTC) and almost every U.S. state sued the social media company today. At issue is the “buy or bury” strategy used to snap up rival firms and keep smaller competitors away. Facebook was charged in two lawsuits of using its financial power to buy out rivals. In 2012, Facebook spent $1 billion to buy Instagram, which at the time was a photo-filter related app.
Eventually, Instagram added a Stories feature that made it extremely popular. At the beginning of this year, Instagram had 1 billion monthly active users and an estimated valuation over $100 billion.. That means that Facebook was the beneficiary of one of the most profitable transactions ever made with a profit of more than $99 billion on paper. Two years later, Facebook paid $19 billion for the messaging app WhatsApp. By the time that deal closed, the rise in Facebook’s shares turned the value of the purchase to more than $21 billion.
Both federal and state regulators want the deals to be overturned even though both were approved by the FTC years ago. If the regulators do agree to start the process of overturning the Instagram and WhatsApp deals, you can best believe that there will be legal challenges initiated by Facebook. 46 states are taking part in the suit with Alabama, Georgia, South Carolina and South Dakota sitting on the sidelines. New York Attorney General Letitia James, speaking on behalf of the coalition of the 46 states, Washington, D.C. and Guam that are suing Facebook, said, “For nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals, snuff out competition, all at the expense of everyday users.” James said that Facebook acquired the companies before they got big enough to challenge Facebook.
“46 states are taking part in the suit with Alabama, Georgia, South Carolina and South Dakota sitting on the sidelines.”
Jennifer Newstead, Facebook’s general counsel, called the lawsuits “revisionist history” and said that antitrust suits don’t exist to punish successful companies. She added that Instagram and WhatsApp became successful after Facebook spent billions of dollars on improving the apps. Newstead added that “The government now wants a do-over, sending a chilling warning to American business that no sale is ever final.” She pointed out that because of the merger, consumers benefited from the decision to make WhatsApp free. Prior to the deal, WhatsApp used to cost $1 to download and a dollar per year for service.
Facebook co-founder and CEO Mark Zuckerberg did not help his own cause with a statement he made in 2008. According to at least one antitrust expert, Zuckerberg wrote in an email “it is better to buy than compete.” Seth Bloom of Bloom Strategic Counsel made an interesting point when he said that it will be hard for the government to “order divestitures of many years ago.” The transactions made by Facebook that are being challenged are six to eight years old and many courts would probably refuse to order Facebook to give up Instagram and WhatsApp. Daniel Morgan, a portfolio manager at Synovus Trust in Atlanta, Georgia, said, “I do not know if the FTC or DOJ will be successful in breaking Facebook up. I’m assuming this will be dragged out in the courts as FB defends itself.” Back in July, Zuckerberg made it clear that Facebook will “go to the mat” to defend itself against a federally ordered divestiture. The executive called the government’s actions “an ‘existential’ threat.”
Interestingly, breaking up big tech seems to be something that both Democrats and Republicans are agreeing on. Both sides have been in favor of breaking up Google and Facebook. Many see the legal actions against the two tech firms as being the biggest antitrust cases against tech since Microsoft’s antitrust case from 1988.
Questions & Answers
Q.Which government bodies are suing Facebook and how many states are involved?
Which government bodies are suing Facebook and how many states are involved?
The U.S. Federal Trade Commission (FTC) and almost every U.S. State are suing Facebook. A coalition of 46 states, Washington, D.C. And Guam are taking part in the suit.
Q.What is Facebook's general counsel's main argument against the lawsuits?
What is Facebook's general counsel's main argument against the lawsuits?
Jennifer Newstead, Facebook's general counsel, called the lawsuits 'revisionist history'. She argued that antitrust suits do not exist to punish successful companies and that the acquired apps became successful after Facebook invested in them.
Q.What was the financial impact of the Instagram acquisition for Facebook?
What was the financial impact of the Instagram acquisition for Facebook?
Facebook bought Instagram for $1 billion in 2012. By early this year, Instagram had an estimated valuation over $100 billion, meaning Facebook profited by more than $99 billion on paper.
Q.Why might it be difficult for the government to overturn these past deals?
Why might it be difficult for the government to overturn these past deals?
According to antitrust expert Seth Bloom, it will be hard for the government to order divestitures from many years ago. The transactions are six to eight years old, and many courts may refuse to order Facebook to give them up.
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