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Friday, February 23, 2024

Lina Khan’s Theory of the Facebook Antitrust Case Takes Shape

When federal judge James Boasberg dismissed the Federal Trade Commission’s antitrust lawsuit against Facebook in June, he gave the agency pretty specific instructions on how to salvage it. The problem, he wrote in his opinion, was that the FTC hadn’t offered even the barest evidence that Facebook is a monopoly, beyond the vague claim that it “maintained a dominant share of the US personal social networking market (in excess of 60 percent).” As Boasberg noted, that inexplicably left some basic questions unanswered, such as: 60 percent of what? Who makes up the leftover 40 percent? It was a bit like accusing a driver of speeding without even mentioning the speed limit. 

To get back into court and advance to the next stage of litigation, the FTC would have to come back with something a lot more specific. That presented an interesting early assignment for Lina Khan, who was confirmed as commissioner of the agency a mere two weeks before Boasberg issued his ruling. (Facebook has sought to have Khan recused from the case on the basis of her public criticism of big tech companies before her current job, though experts see little chance of that succeeding.)

On Thursday, the FTC filed its revised complaint answering those previously unanswered questions. While it’s impossible to predict how a given judge will rule, the new material seems likely to satisfy Boasberg and keep the case alive. “To my eye, they’ve scratched Boasberg’s itch,” said Paul Swanson, an antitrust attorney in Denver. Facebook, he said, may not be able to avoid “a long slog of document productions and depositions.”

To prove that Facebook is a monopoly for legal purposes, the FTC doesn't have to show that it’s literally the only social network. They have to show that it has “market power.” In a nutshell, having market power means you face so little competition that you can do things your customers don’t like without losing any business. It’s one of the main reasons antitrust law exists: When there isn’t enough competition, companies will stop trying to please their customers and start trying to squeeze them. Think about how frustrating it is when your internet provider raises prices and you realize no one else serves your neighborhood. That’s market power.

There are two ways to show market power: indirect evidence and direct evidence. Indirect evidence usually refers to dominant market share. (That might sound counterintuitive, but the reason it’s indirect is because being big on its own doesn’t prove a company is doing anything wrong—it just raises the strong possibility.) In its initial complaint, the FTC only offered indirect evidence, and very little of it: that feeble 60 percent statistic, which Boasberg ruled was inadequate. The revised complaint, on the other hand, goes into great detail on market share. Drawing on data from the analytics company Comscore—which, the complaint notes, Facebook itself relies on—the FTC argues that just about any way you slice it, Facebook controls a dominant chunk of the market for “personal social networking services.” According to the Comscore data, Facebook has accounted for more than 80 percent of time spent since 2011, at least 70 percent of daily active users, and at least 65 percent of monthly active users.

The new complaint also tightens up the FTC’s definition of the market itself, which is another crucial part of any monopolization case. You can’t prove a company has market power without explaining which market they have power in. According to the agency, the market for personal social networking services has three key attributes: First, a network has to be “built on a social graph that maps the connections between users and their friends, family, and other personal connections.” Second, it has to have features for users to interact with each other in a “shared social space,” like a news feed or group. Third, it has to allow users to look each other up. (Think about how you can search for someone by name on Facebook, but not in iMessage.)

The clever thing about this definition is that it rules out companies that Facebook would like to say it competes with. LinkedIn is for professional contacts only, not friends and family. Twitter and Pinterest are about following interests, not connecting with people you actually know. On TikTok, at least in the FTC’s telling, the typical user is broadcasting “video content to an audience that the poster does not personally know.”

The problem with the definition is that it could be seen as arbitrarily narrow, meant to map onto Facebook and only Facebook. In his opinion dismissing the case, Boasberg noted that the FTC hadn’t named a single existing competitor in the market for personal social networking services. In the revised complaint, the agency tries to fix that problem. According to the FTC, the biggest competitor to Facebook—and Instagram, which Facebook owns, and which also fits the FTC’s definition—is Snapchat.

At first glance, this may seem odd. Snapchat is all about ephemeral photos and videos; it lacks a lot of the features that Facebook has. But it hits all three of the FTC’s definitional criteria: It’s mainly about interacting with friends and personal contacts; you can search for the people you know; and there’s (arguably) a shared social space, presumably the Stories feature. It also was famously the subject of Mark Zuckerberg’s repeated but ultimately unsuccessful acquisition attempts.

Whether or not you agree with the FTC’s theory of what should count as a personal social network (it also mentions the privacy-oriented platform MeWe), that evidence should be enough to survive a motion to dismiss, where the agency only has to make a “plausible” argument, not a definitive one. In case it isn’t, the FTC also added direct evidence of market power this time around. First, it argues, Facebook has gone through a series of scandals without seeming to lose business or value. Much of this section is redacted, but it mentions the Cambridge Analytica affair and Facebook’s two settlements with the FTC over privacy abuses. The fact that Facebook hasn’t lost business despite high-profile reductions in the level of privacy it offers users is proof, the FTC argues, that it doesn’t have to worry about competition: “Facebook’s ability to harm users by decreasing product quality, without losing significant user engagement, indicates that Facebook has market power.”

More generally, the FTC points to the fact that Facebook manages to make extraordinarily high profits year after year: $29 billion on only $85 billion in revenue in 2020. A basic idea in antitrust economics is that it should be impossible to have huge profit margins for an extended period, because it means there’s extra money on the table. Toyota can’t just raise prices on its cars, because it knows people will start buying more Hondas. In a competitive market, rivals will see huge profits as an invitation to jump into the fray. The fact that no one has eaten into Facebook’s massive margins, the FTC argues, is more direct evidence of market power.

While this all should be enough to bring the lawsuit back from the dead, the FTC still faces a long road. Facebook, of course, denies all the allegations, and it will get plenty of chances to argue its side of the story in court. Getting past a motion to dismiss doesn’t mean you ultimately win. At this point, all that can be said is that the FTC has finally laid out its theory of the case.

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