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Breaking Down the FTC Lawsuit Against Facebook

The FTC and nearly all U.S. states have sued Facebook for allegedly using its dominance in the digital industry to prevent fair competition.

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This story originally appeared on Cheddar

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In a landmark lawsuit, the FTC and nearly all U.S. states have sued Facebook for allegedly using its dominance in the digital industry to prevent fair competition and are called for the company to be broken up.

But Facebook is claiming their acquisitions like Instagram and WhatsApp have only become the companies they are today because of its investment and strategies, and unwinding the businesses could set a dangerous precedent.

"The most important fact in this case, which the Commission does not mention in its 53-page complaint, is that it cleared these acquisitions years ago," Facebook vice president and general counsel Jennifer Newstead said in a statement. "The government now wants a do-over, sending a chilling warning to American business that no sale is ever final."  

The FTC, along with 48 states and territories, sued Facebook on Wednesday, claiming the company created a monopoly by participating in anti-competitive practices. Its 2012 acquisition of Instagram and 2014 acquisition of WhatsApp, in particular, got rid of threats to its market share. In addition, Facebook is accused of implementing restrictions on third-parties that only allowed them access to their platform and data if they agreed not to work on similar capabilities or use the information in conjunction with rival social platforms. 

"We have asked the court to provide whatever relief is necessary to restore competition," the FTC added. "That could include divestiture of Instagram and WhatsApp, as well as injunctive relief preventing Facebook from pursuing anticompetitive practices like the use of anticompetitive conditions on API access."

Digital Advertising Dominance

Facebook has dominated the online advertising space, making up one half of the so-called "duopoly" alongside Google. It takes in about a quarter of total ad spend worldwide, according to eMarketer. The FTC complaint says the company earned north of $70 billion in revenue in 2019 and more than $18.5 billion in profit. Despite advertising slowdowns during the pandemic, eMarketer is still predicting a 20 percent increase in revenue over last year.

Related: How to Create a Facebook Business Page in 7 Steps

"Facebook has become a powerful player in digital advertising over the years, not only because of the growth of the core Facebook social network but also because of the way Instagram has become intertwined with Facebook's ad buying system," eMarketer principal analyst Debra Aho Williamson said in a statement. 

Defending Acquisitions

Former FTC official Justin Brookman, who is currently the director of technology policy for Consumer Reports, agreed with the lawsuit. 

"For years Facebook has grown its dominance and power by acquiring emerging companies seen as a threat to its business and imposing unreasonable conditions on third-party developers," Brookman said in a statement. "These actions have limited consumer choice, insulated the company from competitive pressures, and resulted in a worse online ecosystem."

Facebook is arguing that people use its services because it has worked hard to make itself the best in the market, fueled by healthy competition from large corporations and startups ranging from Apple to TikTok. The company points out the FTC's lawsuit does not address any election interference and other issues over content moderation, which would not be solved by forcing Facebook to relinquish control of its acquisitions. It noted more than 200 million businesses use its platform for free, many of which are small companies.

"This is revisionist history," Facebook's Newstead said. "Antitrust laws exist to protect consumers and promote innovation, not to punish successful businesses. Instagram and WhatsApp became the incredible products they are today because Facebook invested billions of dollars, and years of innovation and expertise, to develop new features and better experiences for the millions who enjoy those products."

When Facebook acquired Instagram, it only had 2 percent of the users it has today, 13 employees, and no revenue. It was because of its efforts at development that Instagram has grown to the size it is today, the company argued. Breaking up Facebook would send a red flag to any firm that puts money into growing its footprint. 

"This lawsuit risks sowing doubt and uncertainty about the US government's own merger review process and whether acquiring businesses can actually rely on the outcomes of the legal process," Newstead added in a written post. "It would also punish companies for protecting their investment and technology from free-riding by those who did not pay for the innovation, making those companies less likely over the long term to make their platforms available to spur the growth of new products and services."

Facebook intends to defend itself against the allegations. 

"People and small businesses don't choose to use Facebook's free services and advertising because they have to, they use them because our apps and services deliver the most value, Newstead said. "We are going to vigorously defend people's ability to continue making that choice." 

Michelle Castillo

Written By

Michelle Castillo is a staff writer for CNBC Digital, covering advertising and digital media. Previously, she was a digital media reporter for Adweek, and has covered media and entertainment for publications including the Los Angeles Times, The Hollywood Reporter and Time