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Antitrust case against Facebook holds 'little bite,' analysts say

Analysts largely expect Facebook Inc. to prevail in its antitrust battle with the U.S. Federal Trade Commission and a group of attorneys general, noting that fines will be the most likely outcome of the lawsuits rather than significant business model changes.

The FTC and 48 attorneys general from across the U.S. on Dec. 9 filed separate antitrust lawsuits against Facebook. They alleged that the social platform has engaged in anti-competitive behavior and called for several potential remedies, including unwinding Facebook's acquisitions of photo-sharing social network Instagram LLC and mobile messaging app WhatsApp Inc. and requiring Facebook to gain approval for future M&A. Facebook responded that the lawsuits amount to an attempted "do-over" of acquisitions that were previously cleared by regulators.

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Though analysts consider these legal woes a near-term risk to Facebook's stock, they say it will be difficult for regulators to prove Facebook has harmed consumers given the continued popularity of its services. They also challenged allegations that Facebook has stifled competition, pointing to alternative platforms such as Twitter Inc., Snap Inc. and emerging video-sharing app TikTok Inc., which have thrived despite the company's alleged anti-competitive behavior.

Loup Ventures managing partner Gene Munster expects Facebook to most likely pay a "big" fine at the conclusion of the legal battle, and in a worst-case scenario, face difficulties in pursuing future M&A. Munster also anticipates the lawsuits will have little to no impact on Facebook's user engagement in the future.

Facebook's daily active users, or DAUs, came to 1.82 billion on average for the September period, up 12% year over year. Monthly active users, or MAUs, were 2.74 billion as of Sept. 30, a 12% bump from the same quarter a year ago.

"We're addicted to Facebook," Munster wrote in a Dec. 9 report.

Baird analyst Colin Sebastian in a Dec. 9 note also said the lawsuits have "little bite," noting that courts likely "won't buy" the argument that Facebook has unfairly stifled competitors through its acquisition of Instagram and WhatsApp.

"Facebook has built up these services using its own technology and innovation, they are largely integrated on the back end, plus there is obviously intense competition from TikTok, Snap, Twitter, Pinterest Inc., Discord Inc., Parler, among others," Sebastian wrote in a report. "We see very little likelihood that punitive recommendations to split the company will occur. "

Speaking at a July congressional hearing, Facebook CEO Mark Zuckerberg called his firm's purchase of Instagram an "American success story," noting that the entity has served as both a competitor and a complement to Facebook's services.

But outside of Wall Street, perceptions of the lawsuits and their respective merits are a bit more mixed.

Alex Petros, policy counsel at public interest group Public Knowledge, said in an interview that the filings were "very strong complaints" and said he was surprised at some of the evidentiary comments documented from employees in emails.

For instance, in one email unearthed in the Federal Trade Commission's complaint, Zuckerberg allegedly said "it is better to buy than compete."

While Petros acknowledged plaintiffs will have a hard time securing divestitures, he said they are a possibility.

Still, the FTC has a "tricky" case to make, according to Jeffrey Westling, a resident fellow for technology and innovation whose research includes competition policy issues at free-market policy think tank R Street Institute.

The FTC alleged in its suit that Facebook has monopolized the "personal social networking services" market, in violation of Section 2 of the Sherman Act, a federal antitrust law. While the FTC said it does not technically enforce the Sherman Act, it has the ability to bring cases under the FTC Act due to the same types of activities that violate the Sherman Act.

Under this statute, monopoly power by single firms is typically shown by proving that the company has a large share of a relevant market and that entry barriers enable the company to exercise market power for "an appreciable period."

Westling thinks that the case made by the FTC regarding potential anti-competitive harms is stronger than its market power analysis. However, he also notes that, unless they are successful in showing violation of both parts of the law, they will not be able to get any remedies, outside of a settlement.

Westling also said the FTC could reach a settlement with Facebook, as the regulator sometimes ends up settling as a way to avoid risking the chance of losing in litigation.

Notably, Facebook reached a $5 billion settlement agreement with the FTC in 2019 related to violations of a 2012 order regarding the social platform's user data practices. The fine was the largest ever imposed by the agency against a company for consumer privacy violations.

In the case of a settlement, Westling said the agency could agree to drop the pursuit of structural changes, like divestitures, if the company made concessions, such as changes to standards for interoperability.

Both Westling and Petros said they do not expect significant changes in approach to this case from the FTC under a new administration since the complaint was bipartisan and much of the work is done by career officials who have worked under both parties.

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