A big tech break-up? Considering the impact of two antitrust lawsuits on the online advertisement market

Brendan Low

 No one likes the word “monopoly” unless it refers to a board game. Late 2020/early 2021 has brought about a wave of lawsuits against ‘big tech’ firms such as Apple, Google and Facebook on the allegation of monopolistic behaviour. Seeing that the role of big tech in business has become increasingly entrenched, we are justified in taking this news seriously. Firms which we trust with our data in the course of use of their services, have – dare I say it – unprecedented amounts of power over our data, and the unprecedented-ness seems to increase every day with more users flocking over to their services out of a high demand or even necessity.

It is against this backdrop that I write this article, focusing on just one area of impact “big tech” firms may have –the advertisement market. In this article, I suggest that two of these lawsuits, if successful, may have the potential to change the face of the advertisement market, with in turn may lead to improvements in consumer privacy.

The two cases I refer to are the mass antitrust suits against Facebook and Google; the former for the purported hostile acquisition of upstarts with potential such as Instagram and WhatsApp to eliminate competition and the latter for purported monopoly prices over the online advertisement market. These lawsuits were filed only a week apart, indicating a joint direction by the attorney generals of several States to curtail the growing power of big tech companies.

Damning evidence?

It is possible that Facebook may indeed have to divest from Instagram. This is because of an “email trail” of evidence illustratingCEO Mark Zuckerberg’s explicit intent to acquire Instagram to eliminate a“threat”. In correspondence with Facebook’s CFO, Zuckerberg responds to questions by relating to the reasons for buying Instagram:

“[Do we] 1) neutralize a potential competitor?… 2) acquire talent?… 3) integrate their products with ours in order to improve our service?”

Zuckerberg responded, “It’s a combination of (1) and (3).”

This “intent evidence” is crucial because it shows that the Instagram acquisition was not only for (3) – which alone would have been perfectly legal as it amounts to lawful market competition  – but also for (1) – to prevent Instagram from acquiring a greater market share at the cost of Facebook’s share. Analysing the email trail, academic minds such as Professor Allensworth of VanderbiltUniversity and William Kovacic of George Washington University Law School opine that they are an existential threat to Facebook, with Kovacic calling the evidence “damning”[1].

Anew consideration?

This is coupled with the prosecutors “innovative theory” that draws a causal link between anti-competitiveness and the degradation of privacy[2].With the Cambridge Analytic a scandal still fresh in our minds, arguments pertaining to the reduction of privacy may aid the prosecution’s case, to the detriment of Facebook.

What would be lost?

Moving forward on assumption of the very real possibility that Facebook may have to divest fromInstagram, it is important to consider what Facebook would lose from the divestment of Instagram. Currently, Facebook enjoys the “synergistic benefits”of allowing Facebook advertisements to be advertised on Instagram. The mechanics of this is easy, with Instagram with a mere swipe to the right of a virtual flicker switch. The result of this, Facebook boasts, is that its companies enjoy a higher multiplier of ad revenue; a prominent example of this isBrazilian Men’s Lifestyle Brand Kanuire porting a 2.8 times higher return on ad spending compared to what would be expected from advertising only on Facebook[3].There are many other similar case studies.

For the less tech savvy, it is relevant to know that you must have a Facebook account and Facebook page to reap the rewards of Instagram advertisement[4].In other words, the rewards are conditional upon advertising on Facebook. Many of us may not see this as a problem because of the ease at which this can be done, at no additional cost. We do not complain at what appears like a gift. However, this practice has an immense impact on the online advertising market.

We have to seethe phenomenon in light of the increasing market share of the big tech firms.The Wall Street Journal reports that the triopoly of Google, Facebook andAmazon has increased their share of the US online advertisement market from 80%in 2019 to almost 90% in 2020[5]. [FH1] [BL2] For now we keep the third member of the triopoly, Amazon, out for the purposes of the following analysis, and concentrate on the interaction between Google and Facebook (and its subsidiary Instagram) on the online advertisement market. Investopedia reports that though Instagram’s ad revenue is unreported, its advertising growth rate far exceeds that of its parent company. They cite Merkle’s Digital Marketing Report showing Instagram growing177% in 2018 as compared to Facebook’s growth rate of only 40% in the same year.[6]Ian Burrell argues, in the context of criticizing the duopoly that exists between Facebook and Google, that this is due to the “vast data pools” accumulated by them, a rather obvious observation perhaps yet no less daunting. Data has become a “currency” for investment, and the greater the capital the greater the share of the rewards. The empirical evidence show that Facebook owes its position as one of the dominant in the tripoly to Instagram. [FH3] [BL4] The causal link between the possession of large amounts of information (with a corresponding decrease in privacy) and the higher share of advertisement revenue then becomes clearer.

This brings us to the consider what would happen if Facebook lost the case. Professor Newton of the University of Miami notes that where there is a violation of antitrust laws, a breakup would be the “default” remedy. Currently, Facebook andInstagram share their pool of data. This would obviously be separated if a new company were to acquire Instagram.

Potential solutions and why they are likely to fail

We might think that a solution to preserve the “synergistic benefits” between Facebook andInstagram would be simply for the companies to make an agreement to that effect. On top of the complexity of the agreement, the new owners of Instagram would likely be reluctant to do so, in light of the second lawsuit discussed in this article. While the defendant in this lawsuit is Alphabet’s Google, Facebook was accused of cutting a deal with Google to limit their own competition for advertisers, in exchange for preferential treatment in an auction[7],which Financial Times considers to be tantamount to insider trading.[8]The contract even had a sneaky codename, “Jedi Blue”, guaranteed to raise the eyebrows of more than just Star Wars fans[9].The future owners of Instagram would likely not want to step into such legal hot water by forming any advertisement deal with Facebook and risk raising greater government scrutiny.

Thus, it is likely that Instagram will become a “sitting gold mine” for a company looking to enter into or expand within online advertising. I further suggest that this is likely to be a medium- to small-cap company, with a market share smaller than that of Google or Amazon. Other big tech firms – while may not employing the same competition-squashing methods as Zuckerberg – may find themselves easily scrutinised. Assuming that discretion is the better part of valour, they may not seek to repeat the tracks of Facebook.

This leaves us with several questions. How will the online advertisement market landscape look? Will advertisers turn to smaller entities hosting advertisement servers, thereby breaking down the market barriers once propped up by big tech and allowing new entrants to flock in? Or could an endeavour of this size only be brought about by a firm with resources rivalling that of a big tech firm, ironically giving rise to another such big tech firm?

With regards to the (potential) new owner of Instagram, will there be an innovation in services provided? Perhaps more importantly, would there be more privacy and associated freedom of speech? Or does anathema from the root of the gold mine that isFacebook render the excavation as a whole much less profitable?

[1] McLaughlin and Brody, ‘Facebook Breakup Seen as Real Risk inLandmark Antitrust Cases’ <https://www.bloomberg.com/news/articles/2020-12-10/facebook-breakup-seen-as-real-risk-in-landmark-antitrust-cases>accessed 18th January 2021

[2] Brody, ‘The FTC’s Antitrust Case Against Facebook Stakes Out NewGround’, https://www.bloomberg.com/news/articles/2020-12-16/facebook-fb-antitrust-case-has-much-different-goal-than-google-s-googlaccessed 15th March 2021

[3] Facebook for Business,‘Facebook and Instagram Adverting Go Together Like…’ <https://www.facebook.com/business/news/facebook-and-instagram-ads> accessed 18th January2021

[4] Vega, ‘This was Google’s code name for its ‘unlawful agreement’ with Facebook’ <https://nypost.com/2020/12/29/this-was-googles-code-name-for-its-unlawful-agreement-with-facebook/>accessed 18th January 2021

[5] Hagey andVranica, ‘How Covid-19 Supercharged the Advertising ‘Triopoly’ of Google,Facebook and Amazon’ <https://www.wsj.com/articles/how-covid-19-supercharged-the-advertising-triopoly-of-google-facebook-and-amazon-11616163738>accessed 24th March 2021

[6] Simon, ‘How Instagram Makes Money’ <https://www.investopedia.com/articles/personal-finance/030915/how-instagram-makes-money.asp#:~:text=Although%20separate%20figures%20are%20not,exceeds%20that%20of%20its%20parent.>accessed18th January 2021

[7] Vega, ‘This was Google’s code name for its ‘unlawful agreement’with Facebook’ <https://nypost.com/2020/12/29/this-was-googles-code-name-for-its-unlawful-agreement-with-facebook/>accessed 18th January 2021

[8] Waters and Stacey, ‘Google accused of colluding with Facebook inonline ad market’ <https://www.ft.com/content/d2333141-ace0-469d-b75c-8b5fd0367993>accessed 18th January 2021

[9] Vega, ‘This was Google’s code name for its ‘unlawful agreement’with Facebook’ <https://nypost.com/2020/12/29/this-was-googles-code-name-for-its-unlawful-agreement-with-facebook/>accessed 18th January 2021

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