The FTC’s (Federal Trade Commission) antitrust probe of Facebook (FB), which the company disclosed late last month, could be earth-shattering. Neither Facebook nor the FTC has come out publicly to discuss the nature or scope of the probe. However, the details have begun to leak, and they suggest that Facebook has found itself in a tough spot.
The FTC antitrust probe of Facebook is focusing on the company’s acquisition practices going back over several years. Specifically, the FTC is looking into whether Facebook acquired its rivals purposely to neutralize the competition. As part of this probe, the FTC is interviewing the founders of the startups Facebook bought, the Wall Street Journal reported.
What could result from the FTC antitrust probe?
If the FTC antitrust probe of Facebook identifies problems, then the agency could order a range of remedies. One of the likely most consequential remedies would be the requirement that Facebook spin off certain businesses it’s acquired. Facebook has bought about 90 startups over the last 15 years. The company’s prominent acquisitions in the social media space are Instagram and WhatsApp. Facebook bought Instagram for $1.0 billion in 2012. It acquired WhatsApp for $19 billion in 2014. Instagram and WhatsApp, each boasting over 1.0 billion users, have helped cement Facebook’s dominance in the social media market.
Facebook’s portfolio of social apps together gives it a reach of more than 6.0 billion consumers around the world. No other social media company comes close. Snap finished the second quarter with 203 million users on its Snapchat platform. Twitter exited the second quarter with 139 million daily users. Pinterest has 300 million monthly users. Even Tencent’s popular WeChat has a little over 1.0 billion users—just a fraction of Facebook’s total audience reach.
Facebook says it helps startups innovate
Because of its massive consumer reach, Facebook pulls a massive amount of advertising dollars. In the second quarter, for instance, the company generated $16.6 billion in ad revenue, up from $13 billion a year earlier. This year, Facebook will pull a total of $67.4 billion in ad revenue, according to eMarketer estimates. The amount will mark a sharp increase from the $55 billion it generated in 2018.
Facebook monetizes Instagram through advertising. The company previously disclosed that it had 2.0 million active advertisers on the platform. Facebook is gravitating toward advertising as a monetization method on WhatsApp. If the FTC forces Facebook to divest Instagram and WhatsApp, the development could seriously weaken Facebook’s advertising business.
Facebook has argued that its acquisition strategy has nothing to do with stifling competition. Instead, it says that the startups it’s bought have been able to innovate more than they would have independently. Funding innovation can be expensive, meaning that startups with shallow pockets can struggle to innovate to stay competitive, and Facebook has the financial muscle to support even expensive innovation programs. The company finished the second quarter with $48.6 billion in its cash reserve. Therefore, startups that join the Facebook family have access to a massive pool of resources to support their innovative work.
FTC and DOJ conducting antitrust probes of Facebook
The FTC antitrust probe of Facebook became public the day Facebook also announced a $5.0 billion FTC privacy settlement. The FTC antitrust probe of Facebook adds to the antitrust probe the company is also facing from the DOJ (Department of Justice). Last month, the DOJ said it was conducting an antitrust review of companies that dominate spaces such as social media. Facebook dominates the social media space in the US and the world at large. The department’s review will also look into Internet search and online retail leaders, making Google and Amazon targets.