Regulators and Reality

It is coming up on two weeks since the FTC refiled its case against Facebook;1 from the Wall Street Journal:

The Federal Trade Commission filed a new version of its antitrust lawsuit against Facebook Inc. on Thursday, seeking to jump-start its case with bolstered allegations that the company is abusing a monopoly position in social media…The FTC’s amended complaint comes after a federal judge in June dismissed the agency’s original lawsuit, saying it didn’t make sufficient allegations to support claims that Facebook engaged in unlawful monopolization.

With its new, 80-page lawsuit, the FTC seeks to tell a longer, more detailed story about why it believes Facebook is a dominant force that uses its power to hobble any rival that might threaten its market position.

As a quick refresher, the original lawsuit was filed last December and, as I noted at the time, completely failed to characterize Facebook as a monopoly. U.S. District Judge James Boasberg agreed; from his opinion dismissing the case:

Although the Court does not agree with all of Facebook’s contentions here, it ultimately concurs that the agency’s Complaint is legally insufficient and must therefore be dismissed. The FTC has failed to plead enough facts to plausibly establish a necessary element of all of its Section 2 claims — namely, that Facebook has monopoly power in the market for Personal Social Networking (PSN) Services. The Complaint contains nothing on that score save the naked allegation that the company has had and still has a “dominant share of th[at] market (in excess of 60%).” Such an unsupported assertion might (barely) suffice in a Section 2 case involving a more traditional goods market, in which the Court could reasonably infer that market share was measured by revenue, units sold, or some other typical metric. But this case involves no ordinary or intuitive market. Rather, PSN services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear. In this unusual context, the FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague “60%-plus” assertion too speculative and conclusory to go forward. Because this defect could conceivably be overcome by re-pleading, however, the Court will dismiss only the Complaint, not the case, and will do so without prejudice to allow Plaintiff to file an amended Complaint.

As I noted in June, the FTC’s problem was not laziness, but that Facebook doesn’t have a monopoly; given that, you won’t be surprised to learn that I don’t find the FTC’s new case compelling.

The FTC’s Case

Here is the FTC’s new attempt to define Facebook’s market of “personal social networking services” (all quotes are from the amended complaint):

Personal social networking services consist of online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space. Personal social networking services are a unique and distinct type of online service. Three key elements distinguish personal social networking services from other forms of online services provided to users.

First, personal social networking services are built on a social graph that maps the connections between users and their friends, family, and other personal connections…

Second, personal social networking services include features that many users regularly employ to interact with personal connections and share their personal experiences in a shared social space, including in a one-to-many “broadcast” format…

Third, personal social networking services include features that allow users to find and connect with other users, to make it easier for each user to build and expand their set of personal connections. The social graph also supports this feature by informing which connections are suggested or available to users. Within the United States, the most widely used personal social networking services are Facebook Blue, Instagram, and Snapchat.

The next several paragraphs attempt to explain why these are the only three apps in the space:

Personal social networking is distinct from, and not reasonably interchangeable with, mobile messaging services. Mobile messaging services do not feature a shared social space in which users can interact, and do not rely upon a social graph that supports users in making connections and sharing experiences with friends and family…

Personal social networking is distinct from, and not reasonably interchangeable with, specialized social networking services that are designed for, and are utilized by users primarily for, sharing a narrow and highly specialized category of content with a narrow and highly specialized set of users for a narrow and distinct set of purposes…

Personal social networking is distinct from, and not reasonably interchangeable with, online services that focus on the broadcast or discovery of content based on users’ interests rather than their personal connections. Prominent examples are Twitter, Reddit, and Pinterest…

Personal social networking is distinct from, and not reasonably interchangeable with, online services focused on video or audio consumption such as YouTube, Spotify, Netflix, and Hulu. Users employ such services primarily for the passive consumption of specific media content (e.g., videos or music) from and to a wide audience of typically unknown users…

TikTok is a prominent example of a content broadcasting and consumption service that is not an acceptable substitute for personal social networking services. TikTok users primarily view, create, and share video content to an audience that the poster does not personally know, rather than connect and personally engage with friends and family. The purpose for which users employ TikTok, and the predominant form of interaction on the platform, is not driven by users’ desire to interact with networks of friends and family.

There are two major problems with this argument: the FTC’s own definitions, reasonably understood, don’t reflect reality, and second, the definitions themselves have no relation to the actual market for online services.

Start with the parameters laid out by the FTC:

  • First, WhatsApp is a mobile messaging service. So how is Facebook acquiring it illegal? The FTC’s suit attempts to make the case that Facebook was worried that WhatsApp would evolve into a competitor had Facebook not purchased it, but then why doesn’t that concern apply to every other mobile messaging service? It is the height of motivated reasoning to spin the WhatsApp acquisition as anticompetitive while simultaneously excluding the entire category in which WhatsApp resides.
  • Second, arguing that Facebook is unique from every other social network other than Instagram and Snapchat completely ignores what the product actually does. Apparently the fact that LinkedIn lets you feature your resume (as does Facebook, by the way) means the fact that it is explicitly focused on maintaining and facilitating communications and connections doesn’t matter, despite the fact anything you can do on Facebook can be done on LinkedIn.
  • Third, while it is nice that the FTC bothered to include TikTok in their complaint — the December complaint didn’t mention the app once — any definition that says that Instagram is like Facebook but is not like TikTok is ridiculous. Both let you connect with people you know, but both are primarily focused on broadcast-follow dynamics, not interpersonal communication. This distinction, in conjunction with the previous one, is again motivated reasoning: Facebook is much more like LinkedIn, and Instagram is much more like TikTok, but that’s a problem for the FTC because it ruins their case.

The far bigger problem, though, is that everything I just wrote is meaningless, because everything listed above is a non-rivalrous digital service with zero marginal costs and zero transactional costs; users can and do use all of them at the same time. Indeed, the fact that all of these services can and do exist for the same users at the same time makes the case that Facebook’s market is in fact phenomenally competitive.

What, though, is Facebook competing for? Competition implies rivalry, that is, some asset that can only be consumed by one service to the exclusion of others, and the only rivalrous good in digital services is consumer time and attention. Users only have one set of eyes, and only 24 hours in a day, and every second spent with one service is a second not spent with another (although this isn’t technically true, since you could, say, listen to one while watching another while scrolling a third while responding to notifications from a fourth, fifth, and sixth). Note the percentages in this chart of platform usage:

Most American adults use multiple online services

The total is not 100, it is 372, because none of these services exclude usage of any of the others. And while Facebook is obviously doing well in terms of total users, TikTok in particular looms quite large when it comes to time, the only metric that matters:

Users spend more time on TikTok than other social media platforms

This, of course, is why all of these services, including Instagram, Snapchat, and YouTube are trying to mimic TikTok as quickly as possible, which, last time I checked, is a competitive response, not a monopolistic one. You can even grant the argument that Facebook tried to corner the social media market — whatever that is — a decade ago, but you have to also admit that here in 2021 it is clear that they failed. Competition is the surest sign that there was not actually any anticompetitive conduct, and I don’t think it the FTC’s job to hold Facebook management accountable for failing to achieve their alleged goals.

Prices and Politics

Judge Boasberg, in his opinion dismissing the original FTC case, hinted at what seemed to be the FTC’s political motivations:

The Court’s decision here does not rest on some pleading technicality or arcane feature of antitrust law. Rather, the existence of market power is at the heart of any monopolization claim. As the Supreme Court explained in Twombly, itself an antitrust case, “[A] district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed.” Here, this Court must exercise that power. The FTC’s Complaint says almost nothing concrete on the key question of how much power Facebook actually had, and still has, in a properly defined antitrust product market. It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist. After all, no one who hears the title of the 2010 film “The Social Network” wonders which company it is about. Yet, whatever it may mean to the public, “monopoly power” is a term of art under federal law with a precise economic meaning: the power to profitably raise prices or exclude competition in a properly defined market.

Facebook clearly can’t exclude competitors, and, it should be noted, doesn’t even have the means to raise prices; the FTC, frustratingly enough, doesn’t appear to understand how Facebook’s digital ad market works. Eric Seufert wrote in an article entitled Dear FTC, repeat after me: ad platforms don’t set prices:

Multiple times throughout the complaint, the FTC declares that Facebook’s monopoly control over the market for personal social networking resulted in unnaturally high “advertising prices.” This is simply incorrect, and it reveals a lack of understanding of the digital advertising ecosystem and how advertising inventory is priced…

Digital advertising inventory on large platforms like Facebook is sold through an auction: advertisers bid for impressions, the highest bidder wins, and, depending on the auction design used, either the second-highest (in some flavor of a second-price auction, such as the Vickrey-Clarke-Groves auction design that Facebook employs) or the highest (in a first-price auction) bid sets the price for the placement. Most modern, sophisticated ad platforms allow advertisers to bid against conversions — purchases, registrations, etc. — versus simply bidding for an impression, and the ad platforms use campaign performance to throttle delivery based on calculated click and conversion probabilities for any given user…

The price that an advertiser bids on inventory is wholly dependent on the value of conversions that are produced by that platform. And the degree to which advertisers win auctions is dependent on the competition for that inventory. There is no reason to believe that any advertiser would be paying less for advertising inventory on the Facebook Blue app (or website) today if Facebook had not acquired Instagram or WhatsApp, or if any number of competitive products (but not TikTok!) had entered the very-specifically-defined market in which the FTC believes Facebook operates.

This is why Judge Boasberg’s line that “it is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist” stings: Facebook is obviously not particularly popular in Washington D.C., but that is a wholly distinct matter from it being a monopolist. If the powers that be decide that the company needs new kinds of regulation, the answer should be new laws, not redefining antitrust to be about the specific implementation of a non-rivalrous digital service, destroying the credibility of the FTC as a regulator along the way.

Government and Private Industry

That noted, I have to be honest: the prospect of new laws makes me increasingly nervous as well. I absolutely get the case that these platforms are powerful in a way that is deeply suspicious to Americans, and understand the impetus for new regulation, but for me the last two years have been an eye-opening experience about capacity and capability. We have witnessed the federal government, under two different administrations, fumble its way through a pandemic, while its supposedly most capable branch oversaw a disastrous withdrawl from a 20-year nation-building effort that collapsed in a matter of days. The tech industry, meanwhile, has kept the entire world economy running remote with hardly a hiccup, even as other private companies conceived of, tested, and distributed over a billion vaccines and counting. Are we sure we want the former dictating how the latter run their businesses?

China, meanwhile, is going in the opposite direction, taking seats on the board’s of the country’s most innovative companies, driving out founders and killing IPOs, and even limiting when kids can play video games. The most favorable reading of China’s actions is that at least its state has demonstrated the capacity for action — witness how China has brought COVID under control within its borders — but that comes with a level of interference with fundamental freedoms that Americans will never tolerate, and still unanswered questions about just where innovation will come from when pleasing the government is every company’s top priority.

The appropriate response to this challenge — and China is absolutely a challenge — is to reject a top-down approach conducted via regulators with less capacity and greater encumbrances than Beijing, and instead let the tech industry and private companies generally continue to do what they do best: compete. This administration’s antitrust crusaders, unfortunately, don’t really get how markets work. This snippet from The Ezra Klein Show with Tim Wu, a National Economic Council member in charge of technology and competition policy, has stuck with me ever since I heard it in 2016; this was Wu’s takeaway from working in Silicon Valley for a silicon valley startup guilty of accounting fraud:

It kind of changed my thinking about the market and private industry. This was the height of the 90s, government doesn’t have the answers, trust the market, the era of government is over, and I worked in government. The Supreme Court wasn’t perfect, it was relatively public-minded, I don’t think the justices were on the take or anything like that, then I went to private industry, and you know, this was maybe a bad sample — it was WorldCom/Enron era — but these guys didn’t seem to possess any particular wisdom or any special insight into their industry even, they just were all about convincing people to buy a stock, move it up, and then dump it. It really changed my thinking. I actually think I changed my politics, both at the Supreme Court and in Silicon Valley, to become much more suspicious of private actors.

That certainly is about as bad a sample as you can get — I can see why Wu was disillusioned — but here’s the thing: Riverstone Networks, the startup he worked for, ended up in bankruptcy and no longer exists. That is the beauty of the private market — not that everyone is somehow smarter than government, but that there is actual accountability for failure. It’s why Silicon Valley celebrates startups, even though most fail, or are acquired: the best way to innovate is not through top down dictates, but more rolls of the dice.

Lessons Learned

This isn’t my first article about the FTC and tech; back in February 2020, when the FTC requested data from the big five tech companies and their history of acquisitions, I wrote First, Do No Harm; my argument then was that while it would have been better had Facebook not acquired Instagram, thanks to the company’s dominance, regulators risked over-reacting and upsetting a Silicon Valley ecosystem that was driving the U.S. economy.

Two years later, and I have to update my position: in a perfect world with perfect regulators I still think the Instagram acquisition shouldn’t have happened, but you can no longer plausibly argue that Facebook has any sort of monopoly power; look no further than recent tech earnings, where the prevailing story was how company after advertising-supported company was absolutely crushing it, in stark contrast to six years ago when Facebook really did look unstoppable. The market worked.

And, over that same post-February 2020 time period, we have been reminded regulators are not perfect, not even close, even as the tech industry has proven itself to be an even more important and capable asset than ever. Sure it may be a 90s clichĂ© to argue “government doesn’t have the answers, trust the market”, but at some point the reality of the government we have, the competition we face, and the assets we can unleash, has to matter more than holding onto politics for politics’ sake.

  1. I was on vacation 🤷‍♂️