It’s time to break up Facebook

By Nilay Patel

Tim Wu thinks it’s time to break up Facebook.

Best known for coining the phrase “net neutrality” and his book The Master Switch: The Rise and Fall of Information Empires, Wu has a new book coming out in November called The Curse of Bigness: Antitrust in the New Gilded Age. In it, he argues compellingly for a return to aggressive antitrust enforcement in the style of Teddy Roosevelt, saying that Google, Facebook, Amazon, and other huge tech companies are a threat to democracy as they get bigger and bigger.

“We live in America, which has a strong and proud tradition of breaking up companies that are too big for inefficient reasons,” Wu told me on this week’s Vergecast. “We need to reverse this idea that it’s not an American tradition. We’ve broken up dozens of companies.”

And breaking up Facebook isn’t a new idea. Ever since Mark Zuckerberg bought Instagram and WhatsApp, the idea of undoing those deals has been present at the periphery of the conversation about regulating tech companies. Both were serious burgeoning competitors to the social network, and both acquisitions sailed through without serious government oversight, which was a mistake. Instead of facing competition, Facebook was able to swallow its rivals and consolidate the market.

“I think if you took a hard look at the acquisition of WhatsApp and Instagram, the argument that the effects of those acquisitions have been anticompetitive would be easy to prove for a number of reasons,” says Wu. And breaking up the company wouldn’t be hard, he says.

“What would be the harm? You’ll have three competitors. It’s not ‘Oh my god, if you get rid of WhatsApp and Instagram, well then the whole world’s going to fall apart.’ It would be like ‘Okay, now you have some companies actually trying to offer you an alternative to Facebook.’”

Breaking up Facebook (and other huge tech companies like Google and Amazon) could be simple under the current law, suggests Wu. But it could also lead to a major rethinking of how antitrust law should work in a world where the giant platform companies give their products away for free, and the ability for the government to restrict corporate power seems to be diminishing by the day. And it demands that we all think seriously about the conditions that create innovation.

“I think everyone’s steering way away from the monopolies, and I think it’s hurting innovation in the tech sector,” says Wu.

Antitrust law in America seems to be at an inflection point: after a proud history of aggressive enforcement that saw the breakups of everything from Standard Oil to the original AT&T, the past few decades have been incredibly lax as something called the “consumer welfare standard” has swept the courts. Basically, the consumer welfare standard says the government has to show that a merger will result in increasing prices for consumers before it can stop it.

“I think anyone will agree that [the consumer welfare standard] creates a very challenging screen where most antitrust cases die,” says Wu. “And sometimes the prices will go up, but you can’t prove it because it’s hard to prove. That’s what I’m trying to overthrow.”

There are two problems with the consumer welfare standard in 2018: first, after years of dancing around it, giant corporations and their lawyers have learned to make their arguments about price increases ridiculously technical. This leads to comical misdirection. For example, the judge in the AT&T-Time Warner merger case devoted hundreds of pages to the technical discussion of price increases and paid zero attention to the anticompetitive effects of AT&T prioritizing its own video services over others.

Second, it’s all but impossible to show a consumer price increase when major internet services like Google and Facebook are free. Making a case for breaking up these companies will rely on showing a different type of harm than high consumer prices — something like anticompetitive practices, or that innovative businesses get suffocated when they’re absorbed by their gigantic acquirers.

“There are a subset of cases where the primary harm manifests itself as an innovation loss,” says Hal Singer, an economist and antitrust expert. “We need to attack them with a different standard because the probability of prevailing under the consumer welfare standard is zero.”

One or two companies ruling over segments of the market has historically chilled innovation, says Wu.

“I think some people in Silicon Valley are like, ‘Yeah, competition is for losers.’ If you’re competing with other people, you might have to make compromises or [suggest] it’s better just to have one guy, the right guy, making all of the decisions. That’s what AT&T thought. They were like, ‘Listen. We know the phone system. We know what works. This internet stuff is never going to work.’ I think Facebook is in exactly the same position,” Wu said. “They’re trying to set themselves up as regulated monopolist for the foreseeable future.”

And the chilling effect of Facebook and other tech giants buying up every promising startup is noticeable. “​I think if we have a tech economy entirely premised on the idea that monopolists may one day buy the underlying thing, it really limits what can happen,” says Wu.

“Google and Facebook didn’t start that way. There’s a really profound difference in the kind of innovation you see when people are afraid of disturbing the mothership versus what you do when you sense a real opportunity. No one’s willing to fund [profound innovation] because you’re not going to displace Facebook or Google. So we go around the edges somewhere and try and find some cute little thing that doesn’t bother anybody too much and get bought out.”

And so the movement to break away from the consumer welfare standard is growing. Sometimes called the New Brandeis movement, the idea is that the law should prioritize competition. It’s the same sort of standard EU regulators have been using to crack down on big tech companies; these standards were originally based on the American approach under Brandeis and Roosevelt.

“I think we need to simply ask [if] what a large company is doing is part of the competitive process,” says Wu. “Whether, in fact, they’re destroying the other company on the merits or whether they are exceeding the bounds of what’s considered fair competition. You want competition to be something where the better product wins, and the question is: is the defendant winning because they have a better product, or are they winning because they’re using dirty tricks?”

“When you go inside an agency, and you’re facing real cases, this is actually what you’re doing,” says Wu, who spent time working at the Federal Trade Commission. “They don’t mess with the numbers. They look at ‘Okay, Facebook’s killing Snap. Are they doing that in reasonable ways? They’re copying them. Are they better than them, or are they actually doing this in unfair ways?’”

Singer has a different proposal that’s modeled after how Congress decided to regulate cable TV providers like Comcast from discriminating against channels owned by competitors. If a smaller company can show that it’s being meaningfully impaired from competing effectively due to some discrimination against its products, it would have a case.

“Zappos and diapers.com would not have had to sell out to Amazon if they had a venue to defend themselves,” Singer says. “Amazon was able to bring both those companies to their knees because every party knew there was no protection under the antitrust laws.”

It’s the same with Facebook now, he says. “Facebook sits down with someone and says, ‘We could steal the functionality and bring it into the mothership, or you could sell to us at this distressed price.’”

“There’s really nothing to stop Facebook from swallowing all of these verticals.”

The 1914 Clayton Antitrust Act allows mergers to be studied for anticompetitive effects, and Wu thinks the case against Facebook is easy enough that it could be broken up without changing the consumer welfare standard. There’s the simple fact that the number of competitors in social networking went down due to the acquisitions of Instagram and WhatsApp, and there’s also the idea that the number of competitors in what Wu calls the “attention market” decreased as well.

“The easiest way to do it is to start by breaking off WhatsApp and Instagram so those are separate companies,” says Wu. “Hopefully, those companies try to introduce more privacy-sensitive or otherwise better social networking options. Right now, because they’re all owned by the same place, they’re never really allowed to get at the mothership and be a true replacement for Facebook. I think WhatsApp is in an even better position [than Instagram], frankly, to try to go at it. They’ve got this great messaging service. Everyone loves it.”

But wouldn’t reaching in to break up Facebook be difficult for the government to justify? Wu thinks differently. “Unless you believe that we want one ruling master of all social networking and it should be Mark Zuckerberg… then there’s no good reason not to break it up,” he adds. “What’s the argument against it?”

“These are corporations,” says Wu. “They have subunits. Sometimes corporations divide by themselves. It’s not that dramatic, and there’s been this campaign to say, ‘Oh my god, this would be like the most insane thing ever.’”

But won’t getting bigger and bigger lead companies like Facebook and Google to make mistakes, become slower, and create opportunities for new challengers? That has largely been the belief of the tech industry, which has seen the fortunes of companies like AOL, Myspace, and Yahoo dramatically rise and fall. Basically: won’t the market solve for monopoly all by itself?

“It is true that bigness is a curse and leads a company to become doddering and bad,” says Wu. “But the mythology and the problem is assuming that these companies sort of automatically go away. AT&T had a monopoly for 70 years, and by the ‘50s or ‘60s, they were not a great company anymore. They were incredibly hostile to anything new. They thought they knew everything. They thought the internet was a mistake. They didn’t believe in modems. They didn’t believe in answering machines. They were this enormous doddering company, but nothing could get rid of them.”

Breaking up AT&T created massive opportunities for competitors to enter the market, and Wu says the 1990s-era antitrust case against Microsoft was a big factor in creating the modern internet as we know it.

“A whole generation of companies — Google, Facebook, some of these early companies — they don’t owe everything to antitrust, but they owe a sizable debt to the antitrust law,” he says.

Singer agrees. “It’s just hard for me to buy into this claim that [Facebook and Google] are going to be toppled the same way that Myspace was toppled. I feel like these are end-states. I don’t see what dislodges their dominance, at least not in our lifetimes.”

“If you wait long enough, maybe 100 years, they’ll go away. But we could very well have Facebook — an inefficient, ineffective, obsolete company — hanging around for another 20 years,” says Wu. “I’m just not really sure that’s what we need.”

At its most philosophical, antitrust law is the compromise between socialism and capitalism. The idea is that neither the state nor private corporations should amass unchecked power. “I wouldn’t want to live in a socialist country, and I don’t like living in a country where unaccountable capital faces no real check on its power,” says Wu. “The American Revolution was about resistance to centralized power. The Constitution is about resistance. No one entity should have too much power.”

“I’m a believer in the industry of the common man or common woman in charge of their own destiny, a nation of small business, small concerns, people feeling a sense of opportunity, and I think what deadens that is always excessive, concentrated power, whether in government or in private industry.”

“I think we’re in a time where we need to bring back the controls on bigness.”