What Canada should learn from the FTC’s case against Facebook

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Robin Shaban is principal at Vivic Research, an economic consulting firm providing data-driven research for policy makers and advocates.

Canadians are watching the Federal Trade Commission’s anti-trust suit against Facebook with intrigue. If the FTC is successful in its case against the social-media giant, Facebook may be ordered to divest of the WhatsApp and Instagram assets it purchased in 2014 and 2012, respectively.

While the suit may be necessary, we should not see it as a victory. This whole situation could have been avoided if the FTC had challenged Facebook Inc.’s acquisitions of Instagram and WhatsApp years earlier. The moral of this story is that merger regulation in both the U.S. and elsewhere is not doing enough to prevent mergers that are intended to take out future competitors. The case also serves as a warning to Canadians: If we don’t push for reform of our national competition policy, we may find ourselves in the same situation, or worse.

Compelling e-mail quotes found in the FTC’s filing to the court suggest Facebook chief executive Mark Zuckerberg intended to acquire WhatsApp and Instagram to prevent them from becoming competitors in the future. The evidence suggests that Mr. Zuckerberg and his team feared that WhatsApp was poised to launch its own social-networking service as an extension of its messaging service.

Recognizing the growth of social-media use on mobile devices and the rising popularity of photos online, Facebook also knew that Instagram was a coming threat that it could not effectively compete with. Yet, these mergers were still permitted by the FTC, which is now alleging that Facebook’s acquisitions were part of a “systematic strategy” to “eliminate threats to its monopoly.”

We may never truly understand why the FTC allowed Facebook to acquire Instagram and WhatsApp, only to deem those mergers a problem years later. Perhaps it found new evidence through an in-depth study of past mergers by the digital giants. What we do know is that according to the U.S. Horizontal Merger Guidelines, the FTC is supposed to challenge mergers that neutralize potential competitors. There is no reason to think the FTC didn’t follow these guidelines.

The FTC is not the only competition agency that permitted Facebook’s acquisitions. The European Commission also reviewed Facebook’s purchase of WhatsApp in 2014, but did not challenge it. It claimed there was no indication that WhatsApp was planning to launch a social-networking service, but even if it did, the commission determined that WhatsApp and Facebook would not be close competitors. The fact that Mr. Zuckerberg saw a competitive threat in WhatsApp, while the European Commission did not is curious, and troubling.

The strategy of pre-emptively buying businesses that may become your competitors is straight out of the digital-giant playbook. Over the past three decades, the big five digital companies have acquired more than 700 businesses and, on average, the number of acquisitions has increased by 20 per cent per year. Some have talked about the “kill zone” where smaller companies face the threat of being overrun by digital giants, and may sell to avoid the danger. This dynamic undermines innovation by making it harder for entrepreneurs to bring products to market.

The Facebook case raises serious issues about how mergers are evaluated in the U.S. If the FTC overlooked these Facebook acquisitions, how many more harmful mergers has the FTC let slide? We could ask the same question to our national competition authority, the Competition Bureau. Both our law and process for regulating mergers is similar to that of the U.S. But, there are differences that make it even harder for the bureau to prevent mergers that quash potential competitors.

For example, we can speculate about Canadian digital titan Shopify Inc., an e-platform for retailers, and its acquisition of Handshake, a B2B wholesale platform. If Handshake were not purchased by Shopify, could it have become a competitor by expanding its wholesale platform to retailers? And could the bureau have challenged the merger if Shopify did buy Handshake to neutralize them as a potential competitor?

There is no evidence that the bureau reviewed the deal. This is problem No. 1, and may stem from the fact that, generally, companies only need to report acquisitions where the value of the Canadian assets being sold exceeds $96-million (among other criteria). While the price of the Handshake acquisition was not disclosed, TechCrunch reported that it was less than $100-million, according to a source.

Even if the bureau reviewed the merger and found that Shopify bought out a future competitor, it would still have to contend with what is known as the “efficiencies defence” that’s baked into our competition legislation. The defence permits mergers that will stifle competition if the merger creates sufficient cost savings. More often than not, these cost savings come from layoffs. So, even if Shopify did, hypothetically, purchase Handshake to eliminate it as a competitor, the acquisition may still be legal if it led to Shopify laying off a sufficient number of staff or creating other cost savings. No surprisingly, this approach to mergers is not in line with international standards.

To tackle mergers that take out potential competitors, we need to make some changes to Canada’s competition policy. First, we need to get rid of the efficiencies defence, which is what former Competition Bureau commissioner John Pecman has called for since leaving the position. The bureau must also continue to seek out and review tech mergers that do not meet the $96-million notification thresholds. But also, it should practice transparency by adding these reviews to its public register of reviewed mergers.

Lastly, the bureau should revisit tech mergers it has approved over the past decade to flag harmful mergers they may have overlooked. Through this exercise, the bureau can identify where it made mistakes in its past reviews and apply these insights to its future reviews, avoiding the situation we see unfolding in the U.S.

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