Facebook's Legal Battles Could Provide Upside

Despite the Federal Trade Commission and 47 states filing separate antitrust suits, we are maintaining our FVE

11 December, 2020 | 22:52
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The Federal Trade Commission and 47 states have filed separate antitrust suits against Facebook. The FTC claims Facebook has illegally attained market power through the acquisitions of Instagram and WhatsApp and is requesting that the courts order Facebook to spin off those businesses. The FTC also wants to restrain Facebook from making acquisitions in the future. We expect the courts to side with the FTC regarding limitations on future acquisitions, but we think the likelihood of a forced breakup is low. In addition, competition for Facebook continues to emerge. Even if Facebook is forced to spin off Instagram and WhatsApp, its shareholders may ultimately benefit; we estimate that the three companies could fetch more than our US$306 fair value estimate for Facebook if valued separately.

Our skepticism concerning a forced Facebook breakup is based primarily on our review of how interpretation and enforcement of antitrust acts have changed over time. While antitrust laws were initially intended to foster competition by protecting rival companies, interpretations of those laws began to change in the 1970s as courts emphasized consumer welfare, not only firm size. Facebook’s dominance (including Instagram) has not led to explicitly higher consumer prices, as the services remain wholly ad supported. The firm’s network effect benefits current customers as additional users jump on the platform. Also, competition exists in the social network market, where switching costs are minimal. Pinterest, Snap, and Twitter have accelerated user growth and monetization recently, and newer competitors like TikTok have emerged.

Undoing Facebook’s Instagram and WhatsApp acquisitions would also likely hurt advertisers. Given that all of Facebook's businesses are globalized and have created strong engagement among users in nearly all areas globally, advertisers have gained the ability to reach potential customers in new ways, with ad prices generally falling in recent years.

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