Tim Wu: Facebook cannot buy its way out of competition

Anti-trust lawsuit is an attempt to reassert a fundamental rule for all American business.

(Jeff Chiu | AP photo) In this Nov. 21 photo, a demonstrator joins others outside of the home of Facebook CEO Mark Zuckerberg to protest what they say is Facebook spreading disinformation in San Francisco. Federal regulators asked Wednesday, Dec. 9, 2020, for Facebook to be ordered to divest its Instagram and WhatsApp messaging services as the U.S. government and 48 states and districts accused the company of abusing its market power in social networking to crush smaller competitors. The antitrust lawsuits were announced by the Federal Trade Commission and New York Attorney General Letitia James.

The Federal Trade Commission and more than 40 states filed an antitrust suit against Facebook on Wednesday, prompting the company and its defenders to argue that Silicon Valley’s very way of doing business is under attack.

On the contrary. What the federal government and states are doing is reasserting a fundamental rule for all American business: You cannot simply buy your way out of competition. Facebook, led by its chief executive, Mark Zuckerberg, has taken that strategy to a smirking and egregious extreme, acquiring multiple companies to stifle the competitive threat they pose. To ignore the company’s conduct would be to license it, allowing a long-illegal practice to become a norm.

As the metaphor goes, capitalism is a jungle and business is about survival. A business can survive in one of two ways: It can be as good as, or better than, the competition; or it can spend money to buy up any competitors that endanger its market share or disable them using tactics like exclusive dealing. The core message of the Sherman Antitrust Act is that buying up or disabling competitors, while often effective, is prohibited as a means of doing business.

This rule, in effect since 1890, has been widely ignored in Silicon Valley over the past decade and a half. If the first generation of tech juggernauts developed a reputation for ignoring accounting rules (think of WorldCom or AOL), the second generation was notorious for ignoring the basics of antitrust law. During the 2010s, the idea that they could “always just buy any competitive start-ups” (Zuckerberg’s words) became the default strategy for dealing with new threats. Buoyed by high stock prices and with billions of dollars in cash on hand, big companies bought smaller rivals with ease.

No one faults Facebook for gaining its social networking dominance in the first place, beating rivals like Myspace in the 2000s. The trouble is what it did to hold on to the kingdom.

In the early 2010s, Facebook became insecure about its prospects. Younger people began favoring sites like Instagram. Messaging apps, especially WhatsApp, become another popular alternative. As Zuckerberg himself noted, social networking threatened to become a multitude of mechanisms for exchanging information, maybe even — gasp — a competitive marketplace of medium-sized players.

Facebook could have tried to meet these challenges by improving its product. And to be fair, it did continue to innovate and improve — in some ways. But at the same time, as the legal complaint filed this week shows, Facebook also engaged in a campaign to buy or bury many of the most dangerous threats to its dominance: WhatsApp, Instagram and about a dozen others.

Facebook’s strategy was similar to John D. Rockefeller’s at Standard Oil during the 1880s. Both companies scanned the horizon of the marketplace, searching for potential competitors, and then bought them or buried them. That was the essence of the Rockefeller business model. The investigative journalist Ida Tarbell wrote memorably of Rockefeller’s aggressive approach to acquisition: “And nothing was too small: the corner grocery in Browntown, the humble refining still on Oil Creek, the shortest private pipeline. Nothing, for little things grow.”

It was precisely this business model that Congress banned in 1890.

Facebook’s public defense of itself rests on the most rickety of foundations. It notes (correctly) that the federal government did not block its mergers with companies like WhatsApp and Instagram at the time, and then argues (incorrectly) that this means nothing can be done now. But nothing in the law or legal tradition justifies that argument. Standard Oil was broken up in 1911, decades after its greatest offenses; the same was true with the dismantling of Alcoa and AT&T. In historical terms, the case against Facebook is coming quickly.

More important, when the federal government opted not to block Facebook’s mergers with companies like Instagram, it explicitly reserved the right to take another look at the mergers (and in any event, the states were not involved in the federal government’s original decision). There is often information that the government cannot access or know at the time it reviews a merger, but that emerges later. As it often does, the passage of time has made things clearer: Facebook’s conduct became more obviously anticompetitive and the lasting nature of its monopoly became undeniable.

A more radical defense of Facebook suggests that a monopolist buying up its rivals is just “the Silicon Valley way.” But that is a recipe for monopolistic immortality and, ultimately, an acceptance of monopoly capitalism. There have been nations — prewar Germany, today’s China — that have embraced such a thing. But in the United States, we have repeatedly rejected it through the democratic process. Unfortunately, we’ve been backsliding for two decades, which is why the reassertion of the rules is so important.

The Facebook lawsuit is what lawyers call a “big case,” for it may transform the tech industry. It joins a tradition of such cases, including the antitrust suits against Standard Oil, American Tobacco, Alcoa, IBM, AT&T and Microsoft. None of those cases damaged the American economy. On the contrary, the lawsuits were aimed at monopolies that had squashed competition, and they resulted in revitalized, reorganized and ultimately more innovative industries.

It has been more than 20 years since the United States has taken as serious a look at the practices of big business as it is doing now. By that measure, the case against Facebook is long overdue.

Tim Wu, a professor of law at Columbia University who helped popularlize the tearm “net neutrality,” in New York, May 5, 2014. (Tina Fineberg/The New York Times)

Tim Wu (@superwuster) is a law professor at Columbia, a contributing New York Times opinion writer and the author, most recently, of “The Curse of Bigness: Antitrust in the New Gilded Age.”