What Canada should learn from the FTC’s case against Facebook

Canadians are watching the Federal Trade Commission’s anti-trust suit against Facebook with intrigue. If the FTC is successful in its case against the social-media giant, Facebook may be ordered to divest of the WhatsApp and Instagram assets it purchased in 2014 and 2012, respectively.

While the suit may be necessary, we should not see it as a victory. This whole situation could have been avoided if the FTC had challenged Facebook Inc.’s acquisitions of Instagram and WhatsApp years earlier. The moral of this story is that merger regulation in both the U.S. and elsewhere is not doing enough to prevent mergers that are intended to take out future competitors. The case also serves as a warning to Canadians: If we don’t push for reform of our national competition policy, we may find ourselves in the same situation, or worse.

Compelling e-mail quotes found in the FTC’s filing to the court suggest Facebook chief executive Mark Zuckerberg intended to acquire WhatsApp and Instagram to prevent them from becoming competitors in the future. The evidence suggests that Mr. Zuckerberg and his team feared that WhatsApp was poised to launch its own social-networking service as an extension of its messaging service.

Recognizing the growth of social-media use on mobile devices and the rising popularity of photos online, Facebook also knew that Instagram was a coming threat that it could not effectively compete with. Yet, these mergers were still permitted by the FTC, which is now alleging that Facebook’s acquisitions were part of a “systematic strategy” to “eliminate threats to its monopoly.”

We may never truly understand why the FTC allowed Facebook to acquire Instagram and WhatsApp, only to deem those mergers a problem years later. Perhaps it found new evidence through an in-depth study of past mergers by the digital giants. What we do know is that according to the U.S. Horizontal Merger Guidelines, the FTC is supposed to challenge mergers that neutralize potential competitors. There is no reason to think the FTC didn’t follow these guidelines.

The FTC is not the only competition agency that permitted Facebook’s acquisitions. The European Commission also reviewed Facebook’s purchase of WhatsApp in 2014, but did not challenge it. It claimed there was no indication that WhatsApp was planning to launch a social-networking service, but even if it did, the commission determined that WhatsApp and Facebook would not be close competitors. The fact that Mr. Zuckerberg saw a competitive threat in WhatsApp, while the European Commission did not is curious, and troubling.

The strategy of pre-emptively buying businesses that may become your competitors is straight out of the digital-giant playbook. Over the past three decades, the big five digital companies have acquired more than 700 businesses and, on average, the number of acquisitions has increased by 20 per cent per year. Some have talked about the “kill zone” where smaller companies face the threat of being overrun by digital giants, and may sell to avoid the danger. This dynamic undermines innovation by making it harder for entrepreneurs to bring products to market.

The Facebook case raises serious issues about how mergers are evaluated in the U.S. If the FTC overlooked these Facebook acquisitions, how many more harmful mergers has the FTC let slide? We could ask the same question to our national competition authority, the Competition Bureau. Both our law and process for regulating mergers is similar to that of the U.S. But, there are differences that make it even harder for the bureau to prevent mergers that quash potential competitors.

For example, we can speculate about Canadian digital titan Shopify Inc., an e-platform for retailers, and its acquisition of Handshake, a B2B wholesale platform. If Handshake were not purchased by Shopify, could it have become a competitor by expanding its wholesale platform to retailers? And could the bureau have challenged the merger if Shopify did buy Handshake to neutralize them as a potential competitor?

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