Facebook cannot buy its way out of competition

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 disables it from using tactics such as 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 startups" (Mr 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 such as 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 favouring sites such as Instagram. Messaging apps, especially WhatsApp, become another popular alternative. As Mr 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.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

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.

A CASE LONG OVERDUE

Facebook's public defence of itself rests on the most rickety of foundations. It notes (correctly) that the federal government did not block its mergers with companies such as 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 offences; 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 anti-competitive and the lasting nature of its monopoly became undeniable.

A more radical defence 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 - pre-war Germany, today's China - that have embraced such a thing. But in the US, we have repeatedly rejected it through the democratic process. Unfortunately, we have 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 revitalised, reorganised and ultimately more innovative industries.

It has been more than 20 years since the US 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. NYTIMES