Facebook’s Business Model Faces Its Toughest Test Yet

(Bloomberg) -- Facebook Inc.’s business model is about to face its toughest test to date as the German antitrust regulator readies findings of an unprecedented probe that combined data protection and competition enforcement.

Andreas Mundt, the chief of Germany’ Federal Cartel Office, will Thursday unveil the results of the three-year investigation into how the social network scoops up data of its customers and whether it illicitly uses its market power to make users agree to that.

Few in the antitrust community doubt that the regulator will use those findings to order Facebook to change its practices, but it’s equally anticipated that the company will fight any such move in court. The stakes are higher for Facebook though than Mundt, according to Michael Dietrich, an antitrust lawyer at Clifford Chance in Dusseldorf, who isn’t involved in the case.

“Mundt has already written legal history with the case, even if he loses in court,” said Dietrich. “For Facebook, by contrast, the whole business model is potentially at risk.”

The German probe is one of many challenges Facebook is coping with in Europe and the U.S. over how it handles personal data, but it goes to the core of the company’s operations. The FCO targets how Facebook collects data on what sites users visit and merges that with their profiles to create a trove of information it sells to businesses to allow them to tailor ads to each user.

In a preliminary finding at the end of 2017, the agency said the practice violates European Union data protection principles. Users are unaware that they’re being tracked even if they aren’t logged in to their Facebook account. Facebook used its dominant position to make people consent to its policies instead of allowing them to have a say in how data is collected, the FCO said at the time.

Facebook said in a statement it disagrees with the Cartel Office’s approach and the “conflation” of data protection laws and antitrust laws, and will continue to defend its position.

No fine will be issued as the regulator used a form of proceeding to handle the case that doesn’t include monetary sanctions.

Mundt’s team is likely to find that users aren’t aware of the bill they’re actually paying, according to Dietrich, the antitrust lawyer.

“Data is the currency of the digital age, and if you were to convert that into money, you’d get to an absurdly high price,” said Dietrich. “If users knew what they are being charged, they would immediately say: not at this price, I’m not crazy.”

For Johannes Caspar, the Hamburg data regulator, who’s regularly traded blows with internet behemoths such as Facebook and Google, the case is important as it will sort out the relationship between antitrust rules and privacy regulation in digital markets. His office has advised Mundt’s in the probe.

"Where there’s no competition, data protection is also in a weak state,“ he said. “But it works both ways: It can’t be that you’re violating privacy rules in order to secure your monopoly position.”

The FCO is relying on a rule developed by Germany’s top court that said a dominant company misuses its position if it forces customers to accept unfair terms. When Mundt started the case, he drew loads of criticism for allegedly stepping on territory reserved for privacy regulators. Recently, that criticism has become less vocal.

“Mundt once again succeeded by eloquently repeating his message via many channels, making everyone understand: There’s a problem here and we need to tackle it,” said Dietrich. “Additionally, Facebook itself is currently not in very good position after all the scandals over Cambridge Analytica and fake news. That didn’t exactly help to gain Facebook sympathy points.“

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