“How dismal it is to see present day Americans yearning for the very orthodoxy that their country was founded to escape.” ― Christopher Hitchens
Last week, 48 American states filed a lawsuit in a DC district Court against Facebook and, among other things, wanted the social media behemoth to be ‘broken up’ into smaller companies – a’la AT&T. The justification, that emerged out of the 128-page lawsuit, was that Facebook has become too big, too powerful, killing smaller innovative companies and crushing competition with its massive cash power.
I was initially confused, and I read the news item again. Yes, it was the US of A and its constituent 48 states that had filed the petition–not some banana republic run by a military autocrat or a kingdom with a whimsical monarch.
The lawsuit specifically cites Facebook’s acquisition of Instagram in 2012 and that of WhatsApp in 2104 and calls it anti-competitive and an example of the company’s predatory tactics.
The main problem with this entire narrative is just one – the acquisition deals were cleared by US government’s Federal Trade Commission (FTC) then and the same agency is now questioning these deals.
This raises a couple of questions. First, was FTC wrong in clearing these deals then, or is it wrong in calling out these deals now?Second, what does it portend for all M&A transactions since then and in the future?
Does it mean that no deal is safe, unless and until it is unsuccessful? For if it is, it could attract the attention of the lawmakers and be broken up. If the deal fails and/or the acquirer company fails, then it is ok, since only the shareholders will lose money, right?
Because that is exactly the message that these lawsuits are conveying.
There is no doubt that Facebook has been insanely successful in growing its business in the last decade. There is also little doubt that the company has probably not put in very strong checks and balances in its internal systems – a fact that was tacitly acknowledged by its founder Mark Zuckerberg, in front of the senate during the hearings.
Facebook has been penalized and continues to be penalized by sovereigns the world over – whether it is in the US or Europe and faces governmental scrutiny in most parts of the world like Australia and India, among others.
However, the call for Facebook to be dismembered raises a few moral and legal questions. One, how is the sovereign entitled to break up a legal entity on the basis of a perceived fear of being too powerful? Will the government compensate the shareholders for loss in value of their investments? What is the legal basis (evidentiary not anecdotal) for such a call?
On the logical side too, there are very disturbing questions that need to be answered if the lawsuit proceeds. Firstly, are we want to punish a company for doing well? Does it mean that we don’t mind mediocrity because of OUR innate ability to deal with that but are fearful of success again die to OUR inadequacy? What kind of message is the lawsuit likely to send to the innovators at Silicon Valley? Is it that if you do well, hide it for you may be facing the wrath of someone’s insecurities?
It is clear that the US law enforcement apparatus has utterly failed to deal with the era of digital misdemeanors. The lawsuit is essentially an admission by the government that ‘hey, we can’t manage you since we can’t even understand the technology and its ramification, so we will try and break you up so that we can out arms around you finally”.
Second, what does the statement “too powerful and influential’ really mean? Who defines it? Just because Facebook, Instagram and WhatsApp today are used by roughly 2 Billion out of the 7 billion people in the world, does it make them invincible? Again, define a metric. Is the new threshold 2 billion, 1.9 billion, 1.5 billion… again, is it # of people as customers, subscribers, advertisers, abusers…?
Finally, on the transaction itself. All such deals have a potential buyer and a potential seller. In a free market either of them has a freedom to NOT do a deal. Were any of the buyers coerced into selling? Again, there is no proof, only rhetorical gibberish.
Consumers have a choice. I know a lot of people who have logged out of FB in the last few months. Many more have quit WhatsApp due to its toxic and fake news nature. Others have found it too intrusive. Many more have joined the platform. So is the US government now going to dictate who can join which platform or exit a specific platform, since it is becoming ‘too powerful’? No consumer is being forced to join Facebook. They are coming there because they want to.
It is not something new that the US government is trying. While it succeeded in breaking up AT&T, it has spectacularly failed to repeat the same in the case of IBM and Microsoft. Clearly, some lessons are never learnt.
The US lawmakers may want to learn a thing or two from their EU counterparts. So much so, today companies the world over are extremely wary of the tough EU laws which are tough, managed by very knowledgeable folks and penalties are significant and fast. No one wants to mess with them. The EU by itself doesn’t call for silly arguments like ‘break-up’ etc. They simply penalize the transgressors, again and again, and fast.
Historically, the IT industry is replete with many iconic brands which were once all too powerful only to fall by the wayside when a new challenger emerged. Xerox, Netscape Navigator, Novell, Intel, IBM, Microsoft are examples of once being all powerful and while some of them don’t exist anymore, others have become ‘among other companies’. Innovation and free enterprise are hallmarks of the IT industry culture.
These 48 states are just trying to dent that image.
(L Subramanyan is Founder and CEO of Trivone)