There’s No Roadmap to Breaking Up Facebook

“Break up Big Tech,” has become a rallying cry of consumer advocates and prominent politicians.

But what, in practice, would that actually look like?

Coins2Day spoke with experts in various areas of law and business to see how that might play out with Facebook, which has become a bad boy poster child. The short view: It wouldn’t happen easily, if ever.

Before the government could break up a company, it would need a legal rationale. For all the “obvious” issues of size and power, there would need to be a clear issue to address. Facebook’s size is a direct result of “network effects,” according to Andrew Ching, a professor of the Johns Hopkins Carey Business School. Network effects refer to the value a system offers because of the number of connections it makes possible to other users. People use Facebook because they can find people they know or wish to connect with.

“When you get bigger and bigger, you have disproportionate advantage over your rivals,” Ching said. “Typically, the market can support a [few other] network products,” although the other services must be different enough to attract their own audiences.

Twitter and LinkedIn are two examples that different by function. There are also networks in other parts of the world. But in terms of social connections, Facebook grew to be the biggest, and then bought both Instagram and WhatsApp at prices that seemed astronomical, until the reason appears. “When [Facebook] sees a potential rival that’s a differentiated product and it’s getting traction, what do they do? They buy them,” Ching said. “They are taking over almost every possible niche market. Those networks, if you let them grow, they can be a strong competitive force.” Without competition, there’s no impetus for Facebook to make changes that consumers might want, like increasing respect and care for private information. Right now, where else might people go?

However, a breakup argument has one weak point. “I haven’t seen any study that actually tries to quantify the power of Facebook because these are things that are very hard to measure,” Ching said. Claims that the company abuses its power are difficult to sustain if there are no definitions of the power or to what degree and how Facebook abuses it.

Complicating the question of power is number of users and their profiles. “Facebook is tailing off in terms of the user base,” said Ching. “That’s partly because of the type of people they attract. The younger generation is much less likely to use Facebook. The product itself they cannot change it too much. They have the older generation of people and they want to keep them.”

Essentially, Facebook has a long-term problem of becoming AOL or CompuServe, two older examples of social networks that eventually lost their grip. This is why Mark Zuckerberg scooped up Instagram and WhatsApp at immense prices. “When you hear the numbers, that seems insane,” Ching said. “But it’s not to them because they cannot grow anymore. You no longer have that insight about what the newer generations need.” It’s also why Instagram and WhatsApp have retained their own branding—because the new cool place won’t be one that explicitly says Facebook.

Breakup strategy

A breakup would need a structure to make it possible without unduly punishing shareholders. “The easiest practical thing to do which would be most palatable to Facebook shareholders and investors would be to spin off Instagram and WhatsApp,” said Scott Rostan, a former mergers and acquisitions banker, founder of financial training firm Training The Street, and an adjunct professor at the Kenan-Flagler Business School of the University of North Carolina. Instead of one company, there would now be three.

“That would give people the equitable distribution,” Rostan said. “You owned this company that was the amalgamation of these three platforms before. Now you own them separately.” That would create practical issues, like setting up full operations in areas like accounting that might have been previously shared or managing the tax implications of how a breakup is undertaken.

Another possibility would be outright divestment. Facebook would have to sell Instagram and WhatsApp to other companies, making its competitors stronger. The company might not get anywhere near what it paid for the two, meaning a large financial write-down.

There are a couple of hitches. One is current control of Facebook. A negotiated solution that would bypass the need for a lengthy legal action would require the acquiescence of Zuckerberg, who singly holds a majority of shareholder votes. He could overrule any move to divest from interest in the two services. And current company strategy suggests that he has no interest in doing so—the second problem.

“What is Facebook doing right now?” Rostan said. “They’re scrambling to combine these platforms.” The strategy, announced in January, is supposedly to integrate the messaging services. A byproduct could be the argument that if integrated, there is no longer obvious services to spin off.

Legal tussle

If Facebook won’t cooperate with a breakup, the government would have to make an antitrust case so solid and compelling that a court would force a split. That’s unlikely, according to Eleanor Fox, a professor of trade regulation at New York University’s School of Law and an expert on U.S. Antitrust and competition.

“People are debating— all over the world —whether those mergers should not have been let to happen under the merger laws,” Fox said in an email to Coins2Day, “and, in theory, if a court should find that they are anticompetitive, a sale could be ordered. Post-merger divestitures have been ordered [in the past], but it is rare.”

Such post-merger cases don’t require a proof of monopoly under existing law, only that the acquisitions had increased market power. That returns to the questions of what power Facebook actually has and how to quantify it to see if it has significantly increased.

Given previous experience with cases like Microsoft, any trial could take many years to resolve and the chance of success are far from certain. Unfriending turns out to be a lot harder than finding the right menu selections.

There’s No Roadmap to Breaking Up Facebook—But Here’s Where the Government Might Start

Breakup strategy

Legal tussle

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