Why DOJ Antitrust Review Is Bad News for Facebook


Jul. 25 2019, Updated 7:53 a.m. ET

DOJ opens antitrust review of big tech

The US Justice Department (or DOJ) has opened an antitrust review of America’s big technology companies. The agency hasn’t specified the names of tech giants whose practices it is reviewing for potential antitrust violations. However, the description of the focus of the probe shows Facebook (FB) is on target alongside Google (GOOGL) and Amazon.

The DOJ says its review will look into complaints against the leading Internet search, social media, and e-commerce companies. Google dominates the Internet search market. Similarly, Amazon (AMZN) dominates the e-commerce sector, and Facebook rules the social media space.

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Facebook dominates the social media market in America and the world at large. It controlled 74% of the worldwide social media market and 54% of the US market in June, according to StatCounter. Pinterest (PINS) and Twitter (TWTR) finished June with a 33% and 8.0% share of the US social media market, respectively.

Google controlled 93% of the global Internet search market and 88% of the US search market in June. Amazon dominates the e-commerce sector in America. It will fill 47% of all the online retail sales in the US in 2019, eMarketer data show. eBay (EBAY) ranks in a distant second place with a 6.1% market share. Walmart (WMT) comes in third with a 4.6% market share.

Complaints triggered DOJ antitrust review of big tech

The DOJ has received complaints from consumers and businesses that big tech companies may be abusing their market power. The agency says it will seek redress where it finds violations of the antitrust law. Regulators can hit the companies they find violating antitrust rules with heavy fines and stringent restrictions that weaken their competitiveness. In Europe, regulators have hit Google with antitrust fines running up to $10 billion in a space of just three years. Alongside the fines, European antitrust regulators have also demanded that Google overhaul its business model in some ways. For Facebook, the DOJ antitrust review adds to the regulatory and political pressures the company is facing.

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FTC fines Facebook $5.0 billion over data privacy issue

The Federal Trade Commission (or FTC) had been probing Facebook’s consumer data protection practices for months. It announced its decision this week.

The FTC hit Facebook with a record $5.0 billion fine after establishing the company failed to properly protect people’s data. Also, the agency has decided to impose certain conditions on Facebook. With the fine and conditions, FTC wrapped up its probe of Facebook without taking the company to court.

The FTC settlement enables Facebook to avoid a potentially lengthy court battle, which could distract it from its core targets. However, the $5.0 billion fine is big enough that it could interfere with Facebook’s investment plans. Early this month, Germany also fined Facebook roughly $2.3 million on charges the company underreported content complaints.

Also, Facebook has taken a $100 million fine from the US Securities and Exchange Commission (or SEC). The SEC fine relates to Facebook’s alleged failure to adequately warn investors about its risks. Furthermore, Facebook faces a fine of around $6.0 million in Brazil in relation to the WhatsApp data surrender.

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These fines will reduce Facebook’s cash reserve, potentially leaving the company with less cash to invest in its development. Facebook is undertaking several cash-hungry projects as it works to expand and diversify its business. The company teamed up with Google and Microsoft (MSFT) to fund projects of laying undersea cable networks. Facebook is planning more undersea cable investments. Facebook plans to spend as much as $1.0 billion to lay an undersea cable ring around Africa. Also, Facebook last month launched an initiative to develop a global digital currency called Libra. The Libra project will no doubt require substantial cash investment to get off the ground.

Regulatory pressures taking a toll on Facebook

Heightened regulatory scrutiny of Facebook’s business and practices are beginning to take a toll on the company’s finances. The company’s rising lobbying costs show it. Facebook spent $4.1 million on lobbying activities in the second quarter, according to a regulatory filing cited by CNBC. The company’s lobbying budget increased from $3.7 million a year earlier. Similarly, Amazon (AMZN) spent $4.0 million on lobbying activities tied to its retail business in the second quarter, up from $3.5 million a year ago.

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Companies can lobby lawmakers and others for actions that they believe would favor them in some ways. Facebook lobbied for issues related to tech competition and online advertising during the second quarter. Amazon recently tapped a lobbying firm close to President Trump to lobby Washington for action against counterfeits. As has been noted, the sale of counterfeit products poses a huge challenge to online retailers like Amazon. The company recently added counterfeiting among its major risk factors.

Eventually, Facebook’s lobbying costs could rise, thereby cutting deeper into its finances, as it fights efforts to break it up. Prominent America politicians want Facebook and other big tech companies split up into small companies. The argument is that companies like Facebook have become too powerful that they pose antitrust risks.

The DOJ antitrust review could result in more calls to break up Facebook and other tech giants. However, Facebook says that breaking it up would not solve the concerns that consumers or politicians have raised against it. In fact, the company has actually warned that forcing it to break up would actually be counterproductive. Its argument is that breaking up America’s tech giants would restrict their competitiveness and stifle their innovation. Consequently, that would allow their rivals from China and elsewhere to dominate the global tech space.


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