Writing on Facebook's wall

Targeted advertising is under threat

Meta — the erstwhile Facebook (FB) — has endured a tsunami of bad news in the recent past. It faces an ongoing antitrust lawsuit by America’s Federal Trade Commission (FTC) and the FTC is looking at expanding the scope of investigation, from “personal social networking” to virtual reality (VR). Just by allowing the suit to proceed, US courts have clarified a subtle point, with deep implications for other tech giants. The stock has been hammered. It dropped by 26 per cent after reporting poor results. The entire business model of targeted advertising may be vulnerable. The company has been hurt by new privacy measures instituted by Apple and it faces the threat of similar measures being made mandatory by legislators in the EU and the US. The FTC claims FB (as it then was) followed a “buy or bury” strategy, and acted illegally in buying rivals like WhatsApp and Instagram to protect its monopoly power. The FTC is also examining possible buy/bury strategies used by FB to muscle into VR. The judge wrote the FTC offered enough evidence to argue “Facebook acquired Instagram and WhatsApp in order to neutralize actual and likely future competitors”.

One of the difficulties in proving the FTC’s case is that FB’s services are free, and this was one of the planks in FB’s attempt to get the suit thrown out. Proving a monopoly is stifling innovation and competition generally involves proving it is charging predatory low prices to force out competition, or alternatively charging exorbitant prices which hurt consumers. Hence, just admitting the FTC case involves a tacit admission that a free monopoly may be harmful. This principle could be extended to apply to other tech giants offering free services, and holding high market share in other domains. Proving the FTC’s case will not be easy. The judge wrote “although the agency may well face a tall task in proving its allegations, the Court believes ... the FTC has now alleged enough facts to plausibly establish that Facebook exercises monopoly power in the market for [personal social networking] services”. This suit will tie the company up in a legal battle just when its revenue model faces unprecedented pressure. FB earns close to 99 per cent of its revenues ($118 billion in 2021 with $39.4 billion in profits) via advertising. Its data mining and analysis ensure all the content it shows to users gets high engagement.

Facebook is admittedly brilliant at making sense of users’ engagement patterns. Crucially some of this involves tracking the activity of users across other platforms and watching other online activities. This involves building tracking capabilities into apps. iPhone users can now block such tracking and FB estimates this move alone will cost it at least $10 billion a year in ad revenues. The EU has already voted to ban some targeted ads and the US Congress is now framing legislation to prevent “surveillance advertising”. So, this model of data-mining and targeted advertising may soon become impossible to implement in high-revenue markets. In India, legislators remain oblivious about these trends. But India doesn’t generate enough revenue to compensate for the roadblocks in the EU and the US. Facebook will have to bet big on traction in what it calls the metaverse and it may also have to contend with being forced to sell several of its subsidiaries if the FTC proves its case.