You are here

Buying WhatsApp Tipped Facebook to Monopoly; Why Didn’t FTC Probe Purchase?

Anyone concerned with the anticompetitive state of digital advertising, and how to fix it, should focus like a laser on the circumstances surrounding the 2014 FTC’s pass on formally investigating if the Facebook-WhatsApp acquisition would “substantially lessen competition” under the Clayton Antitrust Act.

That obvious FTC mistake in hindsight, triggered a winner-take-all domino effect that not only tipped Facebook to a social advertising monopoly, but also tipped the overall digital advertising market to the anticompetitive digital advertising cartel that evidently predominates today.

Some brief context is helpful here. This big 2014 FTC mistake was the fourth of a pattern of big anticompetitive FTC mistakes concerning the digital advertising marketplace over the last decade.  

A previous Precursor analysis explained how the 2007 FTC approval of Google-DoubleClick tipped Google to a PC search advertising monopoly; how the 2010 FTC approval of Google-AdMob tipped Google to a mobile search advertising monopoly; how the FTC 2013 shutdown of all five FTC antitrust probes of Google tipped Google to monopoly in mobile licensable operating system and mobile app store for Android; and tipped Google to dominance in Google Location Services, Chrome browser, Google Maps, and YouTube Video. See the overwhelming evidence here.   

It is important to further underscore here, specifically how destructive the Facebook-WhatsApp, winner-take-all, domino effect has been to competition.

It proved the death knell of direct competition between Facebook and Google in social advertising and search advertising respectively. That domino also effectively led to the foreclosure of Microsoft and Yahoo from the mobile search advertising syndication market, which in turn tipped the domino of Apple search and search advertising to be fully outsourced to Google.

That domino then has led to a de facto Google-Facebook digital advertising cartel that has harmed advertisers, publishers and consumers; which in turn has led to the next domino of a broader winner-take-all effect crushing competition more broadly.

(Important note: Google and Facebook are NOT a digital advertising “duopoly,” because they stopped directly competing against each other in their respective core businesses in 2014, and each evidently has divided up the digital advertising market into a de facto Google search advertising syndication monopoly and Facebook a de facto social advertising monopoly that together collusively capture more and more of digital advertising revenue growth.)

The common thread of the FTC’s repeated mistakes in approving Internet platform transactions like Google-DoubleClick, Google-Admob, Facebook-Instagram, and Facebook-WhatsApp is looking at them only as different adjacent markets, not integral elements of closed, comprehensive, integrated, advertising ecosystems; and as self-described “platforms,” not networks or inter-networks, that predictably generate unprecedented, fast and broad, exponential network effects and inter-network effects.

In 2007, the FTC apparently could not grasp the anticompetitive network effects and ramifications that would result from combining Google and DoubleClick, the only two networks that had aggregated more than half of all users, advertisers, and publishers in the world, obviously giving a combined Google-DoubleClick the only advertising network in the world with networks of ~90% of users, ~90% of advertisers, and 90% of publishers.

In 2014, the FTC again apparently could not grasp the winner-take-all, tipping network effects that WhatsApp would give either Facebook or Google+, i.e. most of the aggregated global active monthly users that Facebook and Google+ each had not yet aggregated onto their respective closed systems of networks. The 2014 FTC totally missed that WhatsApp was a network effect tipping point dynamic just like DoubleClick was and proved to be.  

Why didn’t the FTC fully investigate Facebook’s 2014 $19b purchase of WhatsApp?

To start, Facebook-WhatsApp was an extraordinary transaction because never had a company paid $19b for a company with ~$10m in revenues – a truly head-spinning market valuation of ~1800 times annual sales! It was even more extraordinary because The Information reported that Google’s then CEO Larry Page offered to trump Facebook’s offer for WhatsApp! 

Wouldn’t it be logical for the FTC to be curious to learn everything they could about why any company would pay an acquisition price of ~1800 times annual sales, especially given the following.

WhatsApp had a business model that was not designed for fast revenue growth, only user growth, because its business model for 450m users was a free service for a year and then $1 per year per user thereafter. Moreover, WhatsApp had an aversion to adopting an advertising model for a social messenger service, because WhatsApp founders were especially committed to protecting user privacy given the 2013 mass surveillance revelations in the Edward Snowden affair. Furthermore, Facebook evidently had minimal interest in adopting a much slower, revenue-growth subscription model like WhatsApp.

Wouldn’t it also be logical for the FTC to be curious why Google also wanted to buy WhatsApp?

If the 2014 FTC was curious or vigilant, it would want to understand in evidence-based detail why Facebook and Google were willing to throw so much money at WhatsApp for such little apparent revenue growth.

The most logical answer is they both were trying to buy tipping-point, network effects, i.e. they both wanted to buy the user growth leader in India and many other countries where both Facebook and Google were both behind WhatsApp.

In other words, Facebook and Google knew, and were acting like they knew, that the company that won WhatsApp would win a property that could tip one or the other to a social/social advertising monopoly with the biggest global social network of users, per Metcalfe’s law that states that the greater the number of users, the greater the value to the community.

Simply, rather than competing to gain an advantage on merit, Facebook and Google both were “competing” to buy their way to monopoly, which is supposed to be illegal under the Clayton Act because it obviously “substantially lessens competition” in this instance.  

At the time, and in retrospect, the FTC’s rapid approval of Facebook-WhatsApp is perplexing because it occurred without a formal “Second Request” for information, that would have involved civil investigative demands (subpoenas) for information on how and why this extraordinary transaction occurred and what Facebook intended to get out of the transaction for $19b.

Just like the FTC strangely shut down investigations into Google’s antitrust problems, the FTC strangely chose to shut down any further investigation of the Facebook-WhatsApp acquisition when experience, evidence, circumstances, and common sense warranted a much closer look.

This matters now because current FTC Chairman Simons committed in his Senate confirmation process to reviewing past merger approvals like Facebook-WhatsApp: The FTC needs to devote substantial resources to determine whether its merger enforcement has been too lax, and if that is the case, the agency needs to determine the reason for such failure and to fix it. … It would also be good practice to extend the retrospectives to non-merger matters as well.”

Clearly the FTC’s Facebook-WhatsApp decision to not fully investigate whether it could “substantially lessen competition” warrants a “retrospective look,” given that it evidently enabled the rapid and broad metastasizing monopolization of the many different markets listed above.

If a transaction triggering mass extension of monopoly power by more than one company does not constitute “substantially lessening competition” under the Clayton Act, it is hard to imagine a transaction today that would be proposed and could produce worse overall anticompetitive effects.

Please note, two weeks after the FTC approved Facebook-WhatsApp on April 10, 2014, Google defunded Google+ April 24, 2014, which was Facebook’s #1 social competitor, Google+, with about an estimated 750m Google+ accounts. June 30, 2014, Google announced it also was shutting down its Orkut social network that had 300m users and was strong overseas where WhatsApp was stronger. Orkut shut down in September 2014.

Tellingly, in December 2014, Facebook then quietly dropped its Graph Search alternative offered by Bing per Reuters, two months after the EU antitrust authorities closed their six-month investigation of Facebook-WhatsApp.

So what happened in the 7 ½ months after the FTC approved Facebook-WhatsApp without a full merger review?  

 

Google and Facebook went from being intense direct competitors to each other by early 2014 in each other’s core businesses of search and social, to quietly stopping direct competition with each other by the end of 2014, by Google internalizing Google+ and by Facebook internalizing search to be only within Facebook (and not as a Bing search offering in direct competition with Google search.)

Tellingly, Google and Facebook’s joint share of digital advertising revenue growth leaped from about 67% jointly in 2014 to estimates in 2017 of 85% by Morgan Stanley and  99% by Digital Content Next and Pivotal Research.  

Simply, search and social markets in 2014 had Google and Facebook directly competing with each other in their core businesses of search and social respectively. Immediately after the FTC approved Facebook-WhatsApp, Google abruptly stopped competing with Facebook in social, and two months after the EU closed its Facebook-WhatsApp review, Facebook quietly stopped directly competing with Google via its search partnership with Microsoft’s Bing.

The FTC’s pass on reviewing Facebook-WhatsApp responsibly, evidently “substantially lessened competition” between the two competing rivals, Facebook and Google, that were both competing directly in the marketplace and both bidding for WhatsApp.

That’s causation not coincidence.        

In sum, the FTC apparently repeatedly viewed Internet transactions in the best possible light by ignoring their essence, which was combining and multiplying network effects to augment and accelerate already existing winner-take-all effects and tendencies.

Evidently, the previous FTCs repeatedly and tacitly considered Internet network conveniences and efficiencies superior for consumer welfare than the natural inconveniences and inefficiencies of competitive markets for consumer choice, quality and innovation.

The big question for the new Simons FTC will be whether it continues the ostriching status quo that it inherited, of favoring non-enforcement of antitrust laws for Internet platforms, or if it realizes the disastrous results of that predilection for Internet monopolization over competition, and returns to the traditional antitrust view, that Internet companies warrant no special treatment, just special awareness and vigilance of Internet platforms’ unprecedented network effects and anticompetitive potential.

Forewarned is forearmed.  

***

Scott Cleland served as Deputy U.S. Coordinator for International Communications & Information Policy in the George H. W. Bush Administration. He is President of Precursor LLC, an internetization consultancy specializing in how the Internet affects competition, markets, the economy, and policy, for Fortune 500 companies, some of which are Internet platform competitors. He is also Chairman of NetCompetition, a pro-competition e-forum supported by broadband interests. Cleland has testified seven times before the Senate and House Antitrust Subcommittees on antitrust matters. Overall, eight different congressional subcommittees have sought his expert testimony a total of sixteen times. When he served as an investment analyst, Institutional Investor twice ranked him the #1 independent analyst in communications. He is also author of “Search & Destroy: Why You Can’t Trust Google Inc.”

 

***

Precursor LLC Research Series on Asymmetric Accountability Harms:

Part 1:   The Internet Association Proves Extreme U.S. Internet Market Concentration [6-15-17]

Part 2:   Why US Antitrust Non-Enforcement Produces Online Winner-Take-All Platforms [6-22-17]

Part 3:   Why Aren’t Google Amazon & Facebook’s Winner-Take-All Networks Neutral? [7-11-17]

Part 4:   How the Google-Facebook Ad Cartel Harms Advertisers, Publishers & Consumers [7-20-17]

Part 5:   Why Amazon and Google Are Two Peas from the Same Monopolist Pod [7-25-17]

Part 6:   Google-Facebook Ad Cartel’s Collusion Crushing Competition Comprehensively [8-1-17]

Part 7:   How the Internet Cartel Won the Internet and The Internet Competition Myth [8-9-17]

Part 8:   Debunking Edge Competition Myth Predicate in FCC Title II Broadband Order [8-21-17]

Part 9:   The Power of Facebook, Google & Amazon Is an Issue for Left & Right; BuzzFeed Op-Ed[9-7-17]

Part 10: Google Amazon & Facebook’s Section 230 Immunity Destructive Double Standard [9-18-17]

Part 11: Online-Offline Asymmetric Regulation Is Winner-Take-All Government Policy [9-22-17] 

Part 12: CDA Section 230’s Asymmetric Accountability Produces Predictable Problems [10-3-17]

Part 13: Asymmetric Absurdity in Communications Law & Regulation [10-12-17]  

Part 14: Google’s Government Influence Nixed Competition for Winner-Take All Results[10-25-17]

Part 15: Google Amazon & Facebook are Standard Monopoly Distribution Networks [11-10-17]

Part 16: Net Neutrality’s Masters of Misdirection[11-28-17]

Part 17: America’s Antitrust Enforcement Credibility Crisis – White Paper [12-12-17]

Part 18: The U.S. Internet Isn’t a Free Market or Competitive It’s Industrial Policy [1-4-18]

Part 19: Remedy for the Government-Sanctioned Monopolies: Google Facebook & Amazon [1-17-18]

Part 20: America Needs a Consumer-First Internet Policy, Not Tech-First[1-24-18]

Part 21: How U.S. Internet Policy Sabotages America’s National Security [2-9-18]

Part 22: Google’s Chrome Ad Blocker Shows Why the Ungoverned Shouldn’t Govern Others [2-21-18]

Part 23: The Beginning of the End of America’s Bad “No Rules” Internet Policy [3-2-18]

Part 24: Unregulated Google Facebook Amazon Want Their Competitors Utility Regulated [3-7-18]

Part 25: US Internet Policy’s Anticompetitive Asymmetric Accountability - DOJ Filing [3-13-18]

Part 26: Congress Learns Sect 230 Is Linchpin of Internet Platform Unaccountability [3-22-18]

Part 27: Facebook Fiasco Is Exactly What US Internet Law Incents Protects & Produces [3-26-18]

Part 28: How Did Americans Lose Their Right to Privacy? [4-14-18]

Part 29: The Huge Hidden Public Costs (>$1.5T) of U.S. Internet Industrial Policy [4-15-18]

Part 30: Rejecting the Google School of No-Antitrust Fake Consumer WelfareStandard [4-20-18]

Part 31: Why New FTC Will Be a Responsibility Reckoning for Google Facebook Amazon [4-27-18]

Part 32: “How Did Google Get So Big?” Lax Bush & Obama FTC Antitrust Enforcement [5-23-18]

Part 33: Evident Internet Market Failure to Protect Consumer Welfare -- White Paper [5-31-18]

Part 34: What Happened Since FTC Secretly Shut 2012 Google-Android Antitrust Probe? [6-8-18]

 

Q&A One Pager Debunking Net Neutrality Myths