Antitrust law was not written for modern acquisitions like Instagram. A traditional monopoly was a company with such a hold on its industry that it harmed others by fixing prices or controlling a supply chain. Facebook and Instagram presented no obvious consumer harm because their products were free to use, as long as people were willing to give up their data to the network. Facebook’s advertising business was relatively new, especially on mobile phones; Instagram didn’t have a business model at all. Something was a monopoly if it undermined its rivals; Instagram had many rivals. Instagram wasn’t even the first company to make a mobile photo app with filters.
So the Federal Trade Commission started its investigation with a simpler question. Were Facebook and Instagram competing with each other? If they were, it would reduce competition in the marketplace if they were allowed to merge.
First, regulators needed a clear picture of what Instagram thought of Facebook and vice versa, based on internal emails and text messages. Oddly, the FTC would not be gathering this documentation itself. The lawyers for Facebook and Instagram—the same ones who had worked on the deal—were now tasked with finding any evidence showing that the deal shouldn’t go through. They were paid by the companies to investigate the companies.
Employees surmised the federal government didn’t have the resources to do its own digging. They were shocked to learn the scenario was routine for deal approval in the U.S. Despite the obvious conflict of interest, the lawyers had an incentive for doing a thorough job—the threat of being disbarred if they did not. Instagram’s lawyers at Orrick, Herrington & Sutcliffe asked the founders and some of the longest-standing employees to turn over all their email and text histories. They even pored through Systrom’s written notebook, page by page, seizing on items that the FTC might find problematic.
At one point, they found a concerning text message—about the expensive bourbon Systrom had gifted to his employees when Instagram passed Facebook in app store popularity. The Orrick lawyers asked Shayne Sweeney what it meant. He told them that Facebook was one of the most popular apps in the world, and that beating them would be a meaningful milestone for any startup, not just for a competitor. He never heard whether that was a satisfying answer.
The law firm Fenwick & West was conducting a similar probe on the Facebook side. After the lawyers presented their materials to the FTC, Systrom and Zuckerberg were asked to go to Washington, DC, for further questioning. Zuckerberg declined the invitation, choosing to do the interview over video conference. But Systrom went, and sat through gentle interrogation by a room of junior employees, some of whom were clearly excited to meet the head of Instagram. They asked him a lot of technical questions about how Instagram worked, perhaps trying to suss out whether Facebook was telling the truth that Instagram served a completely different purpose in consumers’ lives than Facebook did.
In information it gave to another regulator, the U.K. Office of Fair Trading, Facebook made the case that while it wasn’t directly competitive with Instagram, its just-launched Instagram copycat app called Facebook Camera was. Other apps, like Camera Awesome and Hipstamatic, were downloaded three times more than Facebook Camera, and Instagram was downloaded 40 times more. The argument smartly reframed Facebook as an underdog, trying to compete in a tough new market, as opposed to a giant with 950 million users.
The market sounded crowded the way Facebook described it. The company said there were plenty of other apps like Instagram, including Path, Flickr, Camera+, and Pixable. So the U.K. regulators said they were convinced that allowing the acquisition wouldn’t remove competition from the market. The Office of Fair Trading wrote in its report that it had “no reason to believe that Instagram would be uniquely placed to compete against Facebook, either as a potential social network or as a provider of advertising space.”
They didn’t realize Instagram had already won. The only names on the list that were truly similar to Instagram, complete with filters and social features, were Path, which had fewer than 3 million users, and Hipstamatic, which had peaked at 4 million users and was about to lay off half a dozen of its employees. PicPlz, the app that Systrom and Krieger were so determined to beat after Andreessen Horowitz’s investment in 2010, had shut down in July 2012 and wasn’t even mentioned.
The regulators were shortsightedly looking at the current marketplace and ignoring what Facebook and Instagram had the potential to be in a few years or even months. The real value of Facebook and Instagram was in their network effects—the momentum they gained as more people joined. Even if someone enjoyed using an Instagram competitor like Path more, if their friends weren’t on it, they wouldn’t stay. (Path shut down in 2018 after selling to a South Korean company, Daum Kakao, three years before.) Zuckerberg understood that the hardest part of creating a business would be creating a new habit for users and a group they all wanted to spend time with. Instagram was easier to buy than to build because once a network takes off, there are few reasons to join a smaller one. It becomes part of the infrastructure of society.
That’s why Zuckerberg was ignoring the headlines that called the $1 billion price ridiculous, and was unconcerned that Instagram had no business model. Making money, in Zuckerberg’s opinion, is something to try only once a network is strong enough, so valuable to its users that advertisements or other efforts aren’t going to turn them off. Facebook’s users were comfortable with sharing their intimate data on the social network before they had any reason to question the site’s motives.
The network effect was also why Facebook would eventually recover from its investors’ panic about making money on mobile. Facebook had millions of users on its mobile phone app—it just hadn’t fully turned on the money machine. Instagram’s network would be lucrative one day too. The way Zuckerberg saw it, as long as there were users, there was a potential to create a business around them—and the more users, the better.
Instagram was also a threat to the thing Facebook wanted from its users the most: time on its site. Facebook was in fierce competition with any other network that people would choose to visit in a spare moment— anything that allowed people to see what was going on in other people’s lives and post about their own. The stronger Instagram’s network got, the more it would become an alternative to Facebook for those moments of blank space in a day—in a cab, in line for coffee, bored at work.
Facebook was a master at strategically massaging the truth to reduce government scrutiny, presenting itself as a scrappy upstart when it wasn’t. But the company’s paranoia was real. Any fast-growing social media product was a threat to Facebook’s network effect and the time users spent there. It was Facebook’s job to not let anyone else catch up; Zuckerberg had instilled this value in his employees by ending all staff meetings with an unambiguous rallying cry: “Domination!”
There were signs Instagram was achieving a winner-take-all effect. Its growth was accelerating. At the time of the acquisition, the company had 30 million users. By the middle of the summer, it had more than 50 million. The Office of Fair Trading’s report says nothing about network effects, indicating that Facebook didn’t fully explain its logic behind the deal. They took an opposite read on Instagram’s growth. “Whilst this indicates the strength of Instagram’s product, it also indicates that barriers to expansion are relatively low and that the attractiveness of apps can be ‘faddish,'” the report said.
Today, Facebook is still the most dominant social network in the world, with more than 2.8 billion users across several social and messaging apps, and the primary driver of its revenue growth is Instagram. Analysts would later say that approving the acquisition was the greatest regulatory failure of the decade. Even Chris Hughes, one of the cofounders of Facebook, would in 2019 call for the deal to be undone. “Mark’s power is unprecedented and un-American,” he wrote in The New York Times.
The FTC’s investigation in the summer of 2012 happened behind closed doors, with no public report about its findings. Facebook says “the process was both robust and thorough,” led by “very competent staff.” When the proceedings closed, the regulator sent letters to Facebook and Instagram telling them that “no further action is warranted at this time.” The letters included a caveat that they might take another look later, “as the public interest may require.”
From No Filter: The Inside Story of Instagram, by Sarah Frier. Copyright © 2020 by Sarah Frier. Reprinted by permission of Simon & Schuster, Inc.
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