'Smoking gun' email emerges in Facebook antitrust case
‘Smoking gun’ email in Facebook antitrust case shows how company ‘degrades privacy when it doesn’t fear competition’ – but Wall Street analysts doubt government push to split off Instagram and WhatsApp will prevail
- Antitrust suit cites key email from 2011 by unnamed Facebook executive
- He argues Facebook should delay privacy changes until competition dies down
- Email illustrates the core of the government’s argument in the landmark case
- Forty-six states and the Federal Trade Commission filed lawsuits on Wednesday
- The suits accuse Facebook of monopoly abuse and seek to split the company up
- They specifically target deals to buy Instagram and WhatsApp as illegal
- Facebook bought Instagram for $1B in 2012 and WhatsApp in 2014 for $19B
- It amounts to the largest antitrust challenge that Facebook has ever faced
- Facebook blasted the litigation as ‘revisionist history’ and vowed to fight back
- The company points out that the FTC approved its acquisitions at the time
A ‘smoking gun’ email has emerged that illustrates the government’s core case in its landmark antitrust suits against Facebook, but Wall Street analysts doubt that the case will succeed in forcing the company to spin off Instagram and WhatsApp.
In lawsuits filed on Wednesday by 46 states and federal regulators, the government accuses Facebook of illegally acquiring its competitors in a ‘predatory’ manner in order to dominate the market.
Because U.S. antitrust law hinges on demonstrating harm to the consumer, typically in the form of higher prices, the government faces an uphill battle in showing how users of Facebook’s free product have suffered from a lack of competition.
In a novel approach, the lawsuits argue that Facebook, which in its early days made elaborate vows to protect the privacy of user data, grew lax about privacy specifically in response to the lack of competition, gobbling up more and more data that it monetized by selling targeted ads.
A series of emails from 2011 quoted in the states’ complaint illustrate this argument. Google had just launched its social media product Google+, prompting Facebook COO Sheryl Sandberg to warn, ‘For the first time, we have real competition and consumers have real choice … we will have to be better to win.’
A ‘smoking gun’ email has emerged that illustrates the government’s core case in its landmark antitrust suits against Facebook. Above, Facebook CEO Mark Zuckerberg is pictured
COO Sheryl Sandberg (above) warned in 2011: ‘For the first time, we have real competition and consumers have real choice … we will have to be better to win’
Key emails quoted in the antitrust suit show how Facebook executives planned to hold off on making unpopular changes until the competitive threat from Google+ began to ‘die down’
At the time, Facebook was considering a product change that would prevent users from untagging themselves in photos posted by others — a change the company knew would be unpopular, but which would give it a richer set of user data.
One unnamed Facebook executive responded to the proposal in an email, writing, ‘IF ever there was a time to AVOID controversy, it would be when the world is comparing our offerings to G+,’ and recommended delaying any controversial changes ‘until the direct competitive comparisons begin to die down.’
Ultimately, Facebook dialed back a number of its planned changes, and in particular continued to allow users to ‘untag’ themselves in photos, according to the complaint.
The government plans to argue this shows how competition spurred Facebook to protect user privacy — and conversely, how a lack of competition encouraged the company to grow lax about privacy concerns when users have few alternatives.
Facebook’s General Counsel Jennifer Newstead argues the opposite, saying that the company achieved dominance in social media precisely because it perfected its product and attended to the concerns of users.
‘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,’ she told DailyMail.com in a statement.
Facebook’s value has grown from around $70billion to more than $700billion in the period in which officials claim the company has been illegally running a monopoly
Meanwhile, prominent analysts have cast doubt on whether the government will succeed in its bid to force Facebook to sell off Instagram and WhatsApp.
‘We’re talking about acquisitions that are six or eight years old and it will be difficult for a court to order divestitures of many years ago,’ Seth Bloom of Bloom Strategic Counsel told Reuters.
Bloom said the complaints against Facebook are ‘significantly weaker’ than the DOJ’s recent antitrust lawsuit against Google.
Wedbush analyst Michael Pachter said in a note that he is ‘skeptical that the FTC will prevail’ in forcing a breakup as it would be hard to prove that Facebook ‘precluded competition.’
He noted, however, that there is ‘certainly merit to the FTC’s allegations that Facebook has strengthened its competitive position’ through the Instagram and WhatsApp acquisitions.
‘Consumers do not appear to be harmed’ by Facebook’s acquisitions, said KeyBanc and the firm fails to see why a multiyear breakup process should take place. The firm says the suits ‘will likely be resolved with another fine and additional scrutiny on future M&A.’
Experts agree that the complaints against Facebook presage a protracted legal battle that could drag on for years before reaching a definitive conclusion.
The complaints on Wednesday accuse Facebook of buying up rivals, focusing specifically on its previous acquisitions of photo-sharing app Instagram for $1 billion in 2012 and messaging app WhatsApp for $19 billion in 2014.
‘For nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals, snuff out competition, all at the expense of everyday users,’ said New York Attorney General Letitia James, who spearheaded the suit filed by 46 states.
‘Facebook targets competitors with a ‘buy or bury’ approach: if they refuse to be bought out, Facebook tries to squeeze every bit of oxygen out of the room for these companies,’ her office said.
The coalition of 46 states, Washington DC and Guam has called on judges to rule that Facebook’s acquisition of WhatsApp and Instagram were illegal.
The Federal Trade Commission filed its own lawsuit, accusing Facebook of ‘squelching’ the threat from WhatsApp and Instagram – an attitude reflected in a 2008 email by Zuckerberg which said ‘it is better to buy than compete’.
The action by both Democratic and Republican officials highlights the growing political consensus to hold Big Tech accountable, and comes weeks after the Department of Justice launched a suit against Google which accused the $1trillion firm of using its market power to fend off rivals.
Facebook boss Mark Zuckerberg and Twitter chief Jack Dorsey were both hauled in for a highly-politicised Senate hearing last month, and Donald Trump has feuded with both firms over alleged bias and the fact-checking of his posts.
The federal lawsuit comes just weeks before Trump leaves office to be replaced by Joe Biden, who was less combative about Big Tech during the campaign.
In a statement to DailyMail.com, Facebook’s general counsel Jennifer Newstead blasted the litigation, calling it ‘revisionist history.’
‘Antitrust laws exist to protect consumers and promote innovation, not to punish successful businesses,’ she said. ‘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.’
New lawsuits from 46 states and the FTC accuse Facebook CEO Mark Zuckerberg of anti-competitive conduct and seek to break up the company
The 123-page lawsuit filed by 46 US states describes Facebook’s alleged efforts to ‘buy or bury the competition’ to maintain its social media monopoly.
Here are some of the allegations in the lawsuit, which Facebook has vowed to contest:
Early years: Facebook ‘hones its tactics to avoid competition’
Facebook enjoyed meteoric early growth by out-competing other websites such as Myspace. But Zuckerberg and his colleagues had already ‘honed some tactics’ to ‘extinguish or impede’ their rivals, the lawsuit claims.
In 2009, Facebook made an ‘aggressive overture’ to FriendFeed, an aggregator which pulled together content from various social media sites. Fearing that Twitter was about to acquire the company, Facebook bought it out.
One Facebook employee who had described FriendFeed as ‘the company I fear most’ expressed the sentiment in an email that ‘we can just buy them’.
In 2010, Facebook bought a Malaysian company called Octazen which provided contact details for potential users.
Facebook was already licensing the company’s services, but when it turned out Twitter was doing the same, attention turned to how Facebook could ‘deprive rivals and potential rivals of this important resource’, the lawsuit claims.
A Facebook executive said that ‘an acquisition could be interesting if for a few million we could slow some competitors down for a quarter or so’. Once Facebook bought the firm, it ‘terminated all third-party access to Octazen’.
‘The wrath of Mark’: Zuckerberg buys out ‘really scary’ Instagram
The lawsuit says that Facebook ‘increasingly took anticompetitive steps to maintain its monopoly’ from about 2012, after it had seen off the short-lived threat from Google Plus.
By this time, Facebook bosses were becoming ‘frightened’ at how other firms were moving ahead in the mobile world, it is claimed. Zuckerberg said it was ‘really scary’ that Facebook was ‘very behind’ Instagram, telling colleagues they ‘might want to consider paying a lot of money’ for it.
Asked by his chief financial officer about the motivations for the buyout, Zuckerberg said it was a mixture of wanting to ‘neutralize a potential competitor’ and ‘integrate their products with ours in order to improve our service’.
Instagram’s CEO Kevin Systrom apparently feared that Zuckerberg would ‘go into destroy mode’ if he refused the deal, adding: ‘I don’t think we’ll ever escape the wrath of Mark… it just depends how long we avoid it’.
In April 2012, Facebook bought out Instagram for $1billion, allowing it to discontinue its own Facebook Camera app.
‘Rather than responding to the threat with innovative product development, Facebook simply eliminated Instagram through acquisition,’ the lawsuit charges.
WhatsApp is bought out for a massive $19billion fee that ‘shocked and surprised’ Facebook staff
Facebook faced a ‘unique threat’ to its monopoly from the rise of online messaging services which allowed people to avoid SMS charges and exchange better-quality pictures, the lawsuit says.
By 2013, WhatsApp had surpassed Facebook Messenger with 12.2billion messages sent on the platform every day.
One Facebook executive allegedly said they were ‘super-paranoid’ about the threat from WhatsApp, while Zuckerberg believed it ‘had the potential to enter Facebook’s core market and erode its monopoly power’.
When Facebook bought out WhatsApp for $19billion in 2014, there was said to be ‘shock and surprise’ among Facebook’s own staff at how much they had paid.
The ‘only rationale’ for this, the lawsuit claims, was the ‘elimination of a potential competitor poised to mount a major challenge to Facebook’s monopoly’.
This led to a reduction of consumer choice by ‘eliminating a viable, competitive, privacy-focused option,’ it is alleged.
Facebook shares fell steadily on Wednesday as news of the pending lawsuit began to spread, and they opened down again on Thursday morning
New York Attorney General Letitia James, a Democrat, led the coalition of 46 states, plus DC and Guam, in the lawsuit seeking to split up Facebook
How century-old antitrust laws could break up Facebook
The lawsuit filed by 46 attorneys general is based on two century-old antitrust laws which were seen as hallmarks of the Progressive Era and once used to break up oil and railroad monopolies.
The Sherman Act of 1890 was used by President Theodore Roosevelt in his ‘trust-busting’ drive in the early 20th century, while the Clayton Act of 1914 strengthened the anti-monopoly laws.
Standard Oil, the American Tobacco Company and the Northern Securities railroad company were among the companies broken up by federal action in those years.
Today, the laws are enforced by the Federal Trade Commission and the Department of Justice, while state attorneys general can also bring lawsuits under the federal laws.
In some investigations, a ‘state attorney general may cooperate with federal authorities’, the FTC says.
In 1998, the federal government sued Microsoft under the antitrust laws, a case which ended in a settlement.
The new case filed by the 46 states accuses Facebook of ‘unlawful monopoly maintenance’ in violation of Section 2 of the Sherman Act.
This makes it illegal to ‘monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states, or with foreign nations’.
The legal filing also alleges that the purchases of WhatsApp and Instagram are unlawful under Section 7 of the Clayton Act.
This prohibits mergers and acquisitions where the effect ‘may be substantially to lessen competition, or to tend to create a monopoly’.
The Facebook filing filing calls for the ‘divestiture’ of what it calls ‘illegally acquired businesses’ from the social media giant.
Buying firms and shutting them down to ‘keep them out of reach of rivals’
In 2012, Facebook bought out Glancee, a ‘social discovery’ app which helped its users to meet people with similar interests in their area.
Facebook ‘acquired Glancee and simultaneously shut the app down, terminating services to Glancee’s 50,000 users,’ the lawsuit says.
In a similar case, Facebook bought out the music video app EyeGroove in 2016 ‘upon learning that Twitter and Snapchat were interested’, then shut it down.
All of this served to ‘extinguish competitive threats’ and keep the apps ‘out of the reach of another firm that could develop the asset,’ the lawsuit claims.
‘The result is less competition, less investment, less innovation, and fewer choices for users and advertisers,’ it says.
Facebook ‘flexes its muscles’ against Vine within hours of its launch
In some cases, instead of buying out its rivals, Facebook ‘turned to an arsenal of exclusionary tactics’ to maintain its monopoly, it is alleged.
One of these cases involved Vine, the six-second video app which was acquired by Twitter before it was launched to the public.
Within hours of the official launch, Facebook executives were already discussing plans to ‘flex its muscles’ against Twitter, the lawsuit says.
Facebook executive Justin Osofsky described how the app initially allowed people to find fellow Vine users that they were friends with on Facebook.
‘Unless anyone raises objections, we will shut down their friends API access today,’ Osofsky said.
‘Yup, go for it,’ Zuckerberg is said to have replied ‘decisively’.
How Facebook ‘abused its control’ of the Find Friends feature to ‘hurt potential rivals’
In its early years, Facebook developed tools that allowed other apps to install a Facebook ‘like’ button, a Find Friends feature and other tools on their own sites.
The lawsuit claims that Facebook has used this as a ‘tool to monitor, leverage, and harm’ potential rivals by stripping them of access to these features.
This allows Facebook to ‘degrade’ potential rivals by denying them access – stopping users from ‘bringing their friend list’ to a new app, and creating a ‘sudden loss of functionality’ which made rival apps appear ‘buggy’, it is claimed.
In 2011, Facebook moved to stop ‘competing social platforms’ from using its tools, helping it to fend off the threat from Google Plus.
The Vine manoeuvre was one example of this, according to the lawsuit, which also accuses Facebook of cutting off Path’s access to the Find Friends feature because it saw the messaging service as a ‘potential substitute for Facebook’.
All of this meant that ‘Facebook abused its control of [these features] to hurt potential rivals at users’ expense,’ the lawsuit alleges.
Zuckerberg is seen in 2013 touting Facebook’s acquisition of Instagram. Facebook is accused of illegally acquired potential competitors in a predatory manner to dominate the market
Facebook’s share price fell during the day on Wednesday as news of the impending lawsuit trickled out, and opened down again on Thursday.
Newstead, the Facebook lawyer, vowed the company would vigorously defend against the lawsuits, and pointed out that the acquisitions of Instagram and WhatsApp had been cleared by the FTC at the time they were consummated.
‘The government now wants a do-over, sending a chilling warning to American business that no sale is ever final,’ she said.
The FTC suit was filed in coordination with James and the other state attorneys general. Attorneys general from Alabama, Georgia, South Carolina and South Dakota did not join the lawsuit.
‘For nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition, all at the expense of everyday users,’ said New York Attorney General James, a Democrat.
‘Instead of competing on the merits, Facebook used its power to suppress competition so it could take advantage of users and make billions by converting personal data into a cash cow,’ she said.
Facebook’s two most utilized strategies were to acquire smaller rivals and potential rivals before they could threaten Facebook’s dominance and to ‘suffocate and squash’ third-party developers that Facebook invited to utilize its platform, the AG’s office said.
The bipartisan backing marks a rare moment of agreement between the Trump administration and Democrats, some of whom have advocated breaking up both Google and Facebook.
Trump has also demanded that Congress repeal the so-called Section 230 protections which shield Twitter and Facebook from content liability.
His demands are a battle cry for conservatives who say they are treated unfairly by Twitter and Facebook, which have both added warning labels to misleading statements by the president and others.
White House press secretary Kayleigh McEnany warned last week that the president might veto a defense bill unless Congress repeals Section 230.
‘Twitter has become a publisher, choosing to fact-check content,’ she said. ‘And when you’re a publisher, there are certain responsibilities with that and you should not be immune from liability.’
President Donald Trump has feuded with social media giants during his term in office, accusing them of bias
The FTC’s 53-page lawsuit is also seeking to break up Facebook.
The agency’s five commissioners currently include three Republicans and two Democrats. Two of the three Republicans, Noah Phillips and Christine Wilson, voted against the Facebook lawsuit.
‘Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition,’ said Ian Conner, director of the FTC’s Bureau of Competition in a statement.
‘Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive,’ he added.
The FTC’s filing makes similar accusations to the states’ lawsuit, focusing on the sales of WhatsApp and Instagram as well as Facebook’s ‘anticompetitive’ use of functions such as Find Friends and the ‘like’ button.
Facebook’s purchase of Instagram came as it was ‘struggling to provide a strong user experience’ on smartphones, having been designed for desktops.
Zuckerberg warned that ‘we need to track this closely’, according to the lawsuit, while other executives ‘watched Instagram’s emergence with mounting anxiety’.
The lawsuit says Zuckerberg acknowledged wanting to ‘neutralize a potential competitor’, saying it would be hard for another rival to match Instagram’s success.
Facebook eventually bought Instagram for $1billion, paying a ‘premium’ to reflect the ‘significant threat that Instagram posed to Facebook’s monopoly’.
‘By acquiring Instagram, Facebook neutralized Instagram as an independent competitor to Facebook,’ the lawsuit says.
On the Instagram acquisition, the states’ suit alleges that Zuckerberg admitted, in early 2012, that Facebook was ‘very behind’ Instagram and a better strategy would be ‘to consider paying a lot of money’ for the photo-sharing app in an effort to ‘neutralize a potential competitor.’
Facebook acquired Instagram for $1 billion, despite the company having no revenue and valuing itself at only $500 million, according to the complaint.
Zuckerberg offered Instagram’s owners double the valuation that Instagram came up with even though Zuckerberg previously told a Facebook investor that the initial $500 million value as ‘crazy,’ the complaint states.
‘A significant portion of the purchase price was a premium paid to remove a competitive threat from the market,’ the complaint says of the Instagram acquisition.
A demonstrator joins others outside of the San Francisco home of Facebook CEO Mark Zuckerberg last month to protest what they say is Facebook spreading disinformation
The lawsuit also focuses on Facebook’s purchase of WhatsApp in 2014, which at the time was the largest acquisition of a venture-backed startup ever.
The suit alleges that Facebook feared WhatsApp, a messaging service with some 400 million global users at the time, would erode its monopoly power.
In 2013, Zuckerberg wrote that WhatsApp or similar products posed ‘the biggest competitive threat we face as a business,’ according to the complaint.
The whopping $19 billion price tag that Facebook paid for WhatsApp was well above the price Zuckerberg had recommended just a few months earlier, the lawsuit claims.
One Facebook employee, while conceding that WhatsApp’s rapid growth made it a valuable company, said the price ‘sounds insane,’ according to the complaint.
The lawsuits argue that the only rationale for the price of the deal was to eliminate a competitive threat, and accuses Facebook of breaking its promise to regulators that it would not combine user data across the two services.
The suit asks the court to restrain Facebook from making further acquisitions valued at or in excess of $10 million without advance notice to the plaintiff states.
It also asks the court for ‘any additional relief it determines is appropriate,’ including the divestiture or restructuring of ‘illegally acquired companies.’
In separate moves, the Justice Department also sued Google in October, accusing the internet giant of abusing its dominance in online search and advertising.
The suits mark the government’s most significant antitrust actions since its historic case against Microsoft two decades ago, which ended in a settlement.
Amazon and Apple also have been under investigation in Congress and by federal authorities for alleged anticompetitive conduct.
Facebook’s full statement in response to the antitrust suits
Jennifer Newstead, Facebook’s Vice President and General Counsel, told DailyMail.com in a statement:
‘This is revisionist history. 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.
‘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. The government now wants a do-over, sending a chilling warning to American business that no sale is ever final.
‘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. We are going to vigorously defend people’s ability to continue making that choice.’
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