In late February 2012, Facebook CEO Mark Zuckerberg emailed his chief financial officer, David Ebersman, to raise the idea of buying smaller competitors, including Instagram and Path. “These companies are fledgling, but established networks, brands are already significant, and if they grow on a large scale, they could be very damaging to us,” he wrote. “Given that we believe that our own assessment is quite aggressive and that we are vulnerable on mobile devices, I am curious to consider whether we should consider going after one or two of them. What you think?”
Ebersman was skeptical. “All the research I have seen is that most offers fail to create the value expected by the acquirer,” he wrote. “I would ask him to find a convincing explanation for what he is trying to accomplish.” Ebersman listed four possible reasons to buy companies and his ideas about each one: neutralize a competitor, acquire talent, integrate products to improve the Facebook service, and “others”.
It is a combination of neutralizing a competitor and improving Facebook, Zuckerberg said in a response. “There is a network effect around social products and a finite number of different social mechanisms to invent. Once someone wins at a specific mechanic, it is difficult for others to impersonate him without doing something different. “
Zuckerberg continued: “One way to see this is that what we are really buying is time. Even if new competitors emerge, buy Instagram, Path, Foursquare, etc. now it will give us a year or more to integrate its dynamics before anyone can get close to its scale again. Within that time, if we incorporate the social mechanics they were using, those new products will not get much traction since we will already have their mechanics implemented at scale. ”
Forty-five minutes later, Zuckerberg sent a carefully worded clarification to his earlier, more flexible comments.
“I didn’t mean to say that we would be buying them to prevent them from competing with us in any way,” he wrote.
Emails between Zuckerberg and Ebersman were revealed today during the House antitrust subcommittee hearing on technology antitrust issues, as Rep. Jerry Nadler (D-NY) asked Zuckerberg about the Instagram acquisition. The emails, along with several other messages and documents from 2012, show that Facebook, and Zuckerberg in particular, wanted to buy Instagram to avoid competition, the committee argued.
“Facebook, by its own admission … viewed Instagram as a threat that could skew Facebook’s business,” Nadler said during Wednesday’s hearing. “So instead of competing with him, Facebook bought it. This is exactly the type of anti-competitive acquisition that antitrust laws were designed to prevent. ”
Sending a clarification about not preventing companies from competing with Facebook is itself evidence that Zuckerberg knew he had revealed too much, according to the committee, a calculated setback intended to help the company avoid future scrutiny of the deal. (In a presentation of the emails to members of Congress, attorneys for the antitrust committee tagged the slide “Whoops!”)
In early April 2012, Zuckerberg was moving toward a deal. “I just need to decide if we’re buying Instagram,” he wrote in a series of emails sent days before he made the offer to buy the company. “Instagram can harm us significantly without becoming big business,” he wrote. Conversely, if Facebook did not buy Pinterest or Foursquare and they were successful, “we will regret not having done so” internally, he added. “We are already working on building some version of Foursquare.”
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The emails are evidence that Zuckerberg viewed Instagram as a possible existential threat to the company, according to the committee, clear statements that the CEO moved to buy the pop-up app to isolate Facebook from current and future competition. For its part, Facebook has said that Instagram competed with some aspects of Facebook, but also complemented its main characteristics.
“It has become clear that Instagram was a competitor in the mobile photo sharing space,” Zuckerberg told Congress on Wednesday. “There were many others at the time. They competed with apps like VSCOCam and PicPlz and companies like Path. It was a subset of the general connection space in which we exist. And by having them join us, they certainly went from being a competitor in the space of being a mobile camera to an app that we could help grow and help get more people out there who can use it. ”
Instagram was very popular in Silicon Valley before it was acquired, and Facebook was not the only bidder interested in acquiring it. Twitter, which had helped Instagram immensely in its early days by allowing users to find their friends using Twitter in the app, made an aggressive speech to buy the company. As Sarah Frier reported this year in her book Unfiltered, Twitter offered the company shares worth between $ 500 million and $ 700 million.
But Instagram co-founder Kevin Systrom rejected the offer, and the first week of April 2012, Zuckerberg called and offered to acquire the company and its 13 employees. The Systrom board, chaired by Matt Cohler, one of the first former Facebook employees, encouraged him to attend the meeting. At the time, Facebook was gearing up for its initial public offering, and had yet to figure out how it would transport its large audience of desktop users to mobile phones that were rapidly becoming ubiquitous.
When they first met, Zuckerberg offered Systrom something Twitter didn’t do: relative independence. In exchange for joining Facebook, the company would give him enormous resources with which to build Instagram and allow him to manage it as CEO. Systrom agreed, and among the reasons he shared with his board of directors was “if Facebook took steps to copy Instagram or point directly to the app, that would make growth much more difficult,” Frier reported. The Facebook Orientation Guide for New Employees contained the phrase: “If we don’t believe what kills Facebook, something else will.”
Systrom sold the company for $ 1 billion, though the final purchase price was $ 715 million, as the deal closed after Facebook’s famous IPO, when the company’s shares had lost much of their value. (Recovered!) The deal underwent a standard review by the Federal Trade Commission in which each company hired its own attorneys to look for any evidence that the deal was anti-competitive and should not be approved. Facebook argued that it didn’t directly compete with Instagram, but that Facebook Camera, a recently launched photo-sharing app, did, and was one of the dozens of photo-sharing apps on the market.
This approach put aside the true strategic value of Instagram, which was to help Facebook build up the world’s largest user base, around which it would build a dominant advertising business. And that value was not widely apparent; When the deal was announced, CNN opined that Zuckerberg was “paying a high price for a startup that has high expectations but no business model.”
The FTC declined to prosecute, in part because antitrust regulation since the 1960s has been based on the idea of consumer harm, measured largely through price increases. Because both Facebook and Instagram offered their services for free, the FTC believed it would have difficulty demonstrating that the deal would harm consumers. A likely result of the antitrust hearing in Congress is a refinement of that standard to take a closer look at deals like these.
Both Facebook and Instagram were much smaller in 2012 than they are today, and it wasn’t clear then that Instagram in particular would evolve into something much bigger than a photo-sharing app. In recent years, as it has grown to more than a billion users, it has effectively become a sequel to the original Facebook, a multipurpose social network with a much younger audience than its parent company.
“I think the FTC had all of these documents … and voted unanimously at the time not to question the acquisition,” Zuckerberg said Wednesday. In hindsight, it probably seems obvious that Instagram would have reached the scale it has today. But at the time it was far from obvious. “
The FTC completed its review of the acquisition in the summer of 2012 without conducting open hearings or issuing a public report. The agency said it could reopen the investigation at an unspecified future date, “as required by the public interest.”
The UK Office for Fair Trade also reviewed the deal, as did, in a rare move, the California Department of Corporations. Neither of them found any reason to block the deal. Within a few months of the acquisition, Instagram and its 80 million users belonged to Facebook.
Still, Zuckerberg’s emails suggest that he knew better than regulators how valuable it would be to acquire Facebook, and other competitive startups, for Facebook.
“Google+ is a bogus clue,” wrote a senior engineer in an internal Facebook thread in January 2012. “We’re getting distracted by a crappy clone, while guys like Instragram and Pinterest are increasing and creating new markets that we should have seen coming.” . “
After the Instagram deal was closed, Zuckerberg emailed the engineer, referencing the post. “I remember your internal post about how Instagram was our threat and not Google+,” he said. “Basically you were right. One thing about startups is that you can often buy them. “
“One reason people underestimate the importance of viewing Google is that we can probably always buy any competitive startup,” Zuckerberg emailed another employee he wrote to congratulate him on the acquisition of Instagram. “But it will be a while before we can buy Google.”
