At the end of February 2012, Facebook boss Mark Zuckerberg emailed his CFO David Ebersman to promote the idea of buying smaller competitors such as Instagram and Path. "These companies are emerging, but the networks are established, the brands are important, and if they grow on a large scale, it could be very disruptive for us," he wrote. "Given that we think our own rating is fairly aggressive and that we are vulnerable in the mobile space, I'm curious whether we should consider tracking one or two of them. What do you think?"
Ebersman was skeptical. "All of the research I've seen is that most deals don't deliver the value the buyer expected," he wrote back. "I would ask you to find a convincing explanation of what you want to achieve." Ebersman listed four possible reasons for buying companies and his thoughts on everyone: neutralizing a competitor, attracting talent, integrating products to improve the Facebook service, and “others”.
It's a combination of neutralizing a competitor and improving Facebook, Zuckerberg said in an answer. “There are network effects around social products and a finite number of different social mechanisms that have to be invented. Once someone wins at a particular mechanic, it is difficult for others to replace them without doing anything else. "
"What we really buy is time."
Zuckerberg continued: "One view is that we are really buying time. Even if some new competitors appear, buying Instagram, Path, Foursquare, etc. now gives us a year or more to integrate their dynamics before anyone can come back to their size. If we include the social mechanisms they use at this time, these new products will not be very well received because we will already be using their mechanisms on a large scale. "
45 minutes later, Zuckerberg sent a carefully worded clarification to his earlier, casual comments.
"I didn't mean to imply that we would buy them to prevent them from competing with us in any way," he wrote.
The emails between Zuckerberg and Ebersman were revealed today during the House's antitrust subcommittee hearing on technology antitrust issues when MP Jerry Nadler (D-NY) asked Zuckerberg about the takeover of Instagram. The emails, along with several other news and documents from 2012, show that Facebook – and especially Zuckerberg – wanted to buy Instagram to avoid competition, the committee argued.
"Facebook says it has seen Instagram as a threat that could potentially distract business from Facebook," said Nadler during Wednesday's hearing. “So Facebook bought it instead of competing with it. This is exactly the kind of anti-competitive acquisition that should be prevented by antitrust laws. "
Sending a clarification about not preventing companies from competing with Facebook is itself evidence that, according to the committee, Zuckerberg knew he had exposed too much – a calculated setback that should help the company make a future check to avoid business. (In a presentation of the e-mails to the congress members, the lawyers of the anti-trust committee labeled the slide with "Whoops!".)
In early April 2012, Zuckerberg sought a deal. "I just have to decide whether to buy Instagram," he wrote in a series of emails sent days before the offer to buy the company. "Instagram can seriously hurt us without becoming a large company," he wrote. On the other hand, if Facebook has not bought Pinterest or Foursquare and they have succeeded, "we will only regret not having done it internally," he added. "We are already working on a version of Foursquare."
The emails are evidence that, according to the Instagram committee, Zuckerberg saw Instagram as a potential existential threat to the company – clear statements that the CEO bought the Upstart app to protect Facebook from current and future competition. For its part, Facebook has stated that Instagram competes with some aspects of Facebook, but has also added to its core functions.
"I knew that Instagram was a competitor in the field of mobile photo sharing," Zuckerberg told Congress on Wednesday. "There were many others at that time. They competed with apps like VSCO Cam and PicPlz and companies like Path. It was a subset of the entire connecting space in which we exist. And by joining us, they undoubtedly changed from a mobile camera competitor to an app that allowed us to grow and achieve more people. "
Instagram was very popular in Silicon Valley before its takeover, and Facebook wasn't the only bidder interested in buying it. Twitter, which had helped Instagram immensely in the earliest days by allowing users to find their Twitter friends in the app, made an aggressive pitch to buy the company. As Sarah Frier reported in her book No Filter earlier this year, Twitter offered the company shares valued between $ 500 and $ 700 million.
However, Kevin Systrom, co-founder of Instagram, declined the offer. In the first week of April 2012 Zuckerberg called and offered to take over the company and its 13 employees. The Systrom board – led by Matt Cohler, an early Facebook employee – encouraged him to attend the meeting. At that time, Facebook was preparing for its IPO and had not yet figured out how to move its large audience from desktop web users to mobile phones, which were quickly becoming ubiquitous.
"If we don't do what Facebook kills, something else will happen."
When they met, Zuckerberg offered Systrom something Twitter didn't do: relative independence. In return for joining Facebook, the company would provide him with tremendous resources to create Instagram and run as CEO. Systrom agreed, and one of the reasons he told his board was: "If Facebook takes action to copy Instagram or target the app directly, it would make growth significantly more difficult," Frier said. Facebook's guidance for new employees included the sentence: "If we don't do what Facebook kills, something else will happen."
Systrom was known to sell the company for $ 1 billion, although the final purchase price was $ 715 million when the deal was closed after Facebook's famously rocky IPO, when the company's shares had lost much of their value. (It has recovered!) The deal was subjected to a standard Federal Trade Commission review, with each company hiring its own lawyers to look for evidence that the deal was anti-competitive and should not be approved. Facebook argued that it didn't compete directly with Instagram – but that Facebook Camera, a recently launched photo sharing app, was and is one of dozens of photo sharing apps on the market.
This approach ignored Instagram's true strategic value, which was to help Facebook build the largest user base in the world around which to build a dominant advertising business. And this value was not generally apparent; When the deal was announced, CNN said Zuckerberg was paying "a high price for a startup that caused a stir, but had no business model."
Zuckerberg's emails indicate that he knew better than regulators how valuable it would be to purchase Instagram for Facebook
The FTC opposed prosecution, also because cartel regulation has been based on the idea of consumer harm since the 1960s, largely measured by price increases. With both Facebook and Instagram offering their services free of charge, the FTC believed that it would be difficult to prove that the deal would harm consumers. A likely outcome of the antitrust hearing in Congress is a refinement of this standard to examine such deals more closely.
Both Facebook and Instagram were much smaller in 2012 than they are today, and it was unclear at the time that Instagram in particular would develop into something much larger than an app for sharing photos. In recent years, when it reached over 1 billion users, it became practically a continuation of the original Facebook – a universal 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 contest the takeover," Zuckerberg said on Wednesday. “In retrospect, it probably looks like Instagram has reached the level it has today. But back then it was anything but obvious. "
The FTC completed its acquisition review in summer 2012 without holding open hearings or publishing a public report. The agency noted that it may reopen the investigation at an unspecified future time "as required by the public interest".
The UK Fair Trade Office reviewed the deal as well as, in rare cases, the California Department of Commerce. No one found a reason to block the deal. Within a few months of the takeover, Instagram and its 80 million users belonged to Facebook.
However, Zuckerberg's emails indicate that he knew better than regulators how valuable the acquisition of Instagram – and other competitive startups – would be for Facebook.
"Google+ is a red herring," wrote a senior engineer in January 2012 in an internal Facebook thread. ”
After the Instagram deal was completed, Zuckerberg emailed the engineer and referred to the post. "I remember your internal post on how Instagram was our threat and not Google+," he said. "You were basically right. One thing about startups is that you can often buy them. "
"One reason people underestimate the importance of Google is that we can probably always buy competitive startups," Zuckerberg emailed to another employee who congratulated him on taking over Instagram. "But it will be a while before we can buy Google."