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Recently-published emails from 2012 between Mark Zuckerberg and Facebook’s then-Chief Financial Officer David Ebersman, in which Zuckerberg lays out his rationale for buying Instagram, have prompted many to speculate that the deal may not have been cleared had antitrust agencies had had access to Facebook’s internal documents at the time.

The issue is Zuckerberg’s description of Instagram as a nascent competitor and potential threat to Facebook:

These businesses are nascent but the networks established, the brands are already meaningful, and if they grow to a large scale they could be very disruptive to us. Given that we think our own valuation is fairly aggressive and that we’re vulnerable in mobile, I’m curious if we should consider going after one or two of them. 

Ebersman objects that a new rival would just enter the market if Facebook bought Instagram. In response, Zuckerberg wrote:

There are network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it’s difficult for others to supplant them without doing something different.

These email exchanges may not paint a particularly positive picture of Zuckerberg’s intent in doing the merger, and it is possible that at the time they may have caused antitrust agencies to scrutinise the merger more carefully. But they do not tell us that the acquisition was ultimately harmful to consumers, or about the counterfactual of the merger being blocked. While we know that Instagram became enormously popular in the years following the merger, it is not clear that it would have been just as successful without the deal, or that Facebook and its other products would be less popular today. 

Moreover, it fails to account for the fact that Facebook had the resources to quickly scale Instagram up to a level that provided immediate benefits to an enormous number of users, instead of waiting for the app to potentially grow to such scale organically. 

The rationale

Writing for Pro Market, Randy Picker argued that these emails hint that the acquisition was essentially about taking out a nascent competitor:

Buying Instagram really was about controlling the window in which the Instagram social mechanic invention posed a risk to Facebook … Facebook well understood the competitive risk posed by Instagram and how purchasing it would control that risk.

This is a plausible interpretation of the internal emails, although there are others. For instance, Zuckerberg also seems to say that the purpose is to use Instagram to improve Facebook to make it good enough to fend off other entrants:

If we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale. 

If this was the rationale, rather than simply trying to kill a nascent competitor, it would be pro-competitive. It is good for consumers if a product makes itself better to beat its rivals by acquiring undervalued assets to deploy them at greater scale and with superior managerial efficiency, even if the acquirer hopes that in doing so it will prevent rivals from ever gaining significant market share. 

Further, despite popular characterization, on its face the acquisition was not about trying to destroy a consumer option, but only to ensure that Facebook was competitively viable in providing that option. Another reasonable interpretation of the emails is that Facebook was wrestling with the age-old make-or-buy dilemma faced by every firm at some point or another. 

Was the merger anticompetitive?

But let us assume that eliminating competition from Instagram was indeed the merger’s sole rationale. Would that necessarily make it anticompetitive?  

Chief among the objections is that both Facebook and Instagram are networked goods. Their value to each user depends, to a significant extent, on the number (and quality) of other people using the same platform. Many scholars have argued that this can create self-reinforcing dynamics where the strong grow stronger – though such an outcome is certainly not a given, since other factors about the service matter too, and networks can suffer from diseconomies of scale as well, where new users reduce the quality of the network.

This network effects point is central to the reasoning of those who oppose the merger: Facebook purportedly acquired Instagram because Instagram’s network had grown large enough to be a threat. With Instagram out of the picture, Facebook could thus take on the remaining smaller rivals with the advantage of its own much larger installed base of users. 

However, this network tipping argument could cut both ways. It is plausible that the proper counterfactual was not duopoly competition between Facebook and Instagram, but either Facebook or Instagram offering both firms’ features (only later). In other words, a possible framing of the merger is that it merely  accelerated the cross-pollination of social mechanics between Facebook and Instagram. Something that would likely prove beneficial to consumers.

This finds some support in Mark Zuckerberg’s reply to David Ebersman:

Buying them would give us the people and time to integrate their innovations into our core products.

The exchange between Zuckerberg and Ebersman also suggests another pro-competitive justification: bringing Instagram’s “social mechanics” to Facebook’s much larger network of users. We can only speculate about what ‘social mechanics’ Zuckerberg actually had in mind, but at the time Facebook’s photo sharing functionality was largely based around albums of unedited photos, whereas Instagram’s core product was a stream of filtered, cropped single images. 

Zuckerberg’s plan to gradually bring these features to Facebook’s users – as opposed to them having to familiarize themselves with an entirely different platform – would likely cut in favor of the deal being cleared by enforcers.

Another possibility is that it was Instagram’s network of creators – the people who had begun to use Instagram as a new medium, distinct from the generic photo albums Facebook had, and who would eventually grow to be known as ‘influencers’ – who were the valuable thing. Bringing them onto the Facebook platform would undoubtedly increase its value to regular users. For example, Kim Kardashian, one of Instagram’s most popular users, joined the service in February 2012, two months before the deal went through, and she was not the first such person to adopt Instagram in this way. We can see the importance of a service’s most creative users today, as Facebook is actually trying to pay TikTok creators to move to its TikTok clone Reels.

But if this was indeed the rationale, not only is this a sign of a company in the midst of fierce competition – rather than one on the cusp of acquiring a monopoly position – but, more fundamentally, it suggests that Facebook was always going to come out on top. Or at least it thought so.

The benefit of hindsight

Today’s commentators have the benefit of hindsight. This inherently biases contemporary takes on the Facebook/Instagram merger. For instance, it seems almost self-evident with hindsight that Facebook would succeed and that entry in the social media space would only occur at the fringes of existing platforms (the combined Facebook/Instagram platform) – think of the emergence of TikTok. However, at the time of the merger, such an outcome was anything but a foregone conclusion.

For instance, critics argue that Instagram no longer competes with Facebook because of the merger. However, it is equally plausible that Instagram only became so successful because of its combination with Facebook (notably thanks to the addition of Facebook’s advertising platform, and the rapid rollout of a stories feature in response to Snapchat’s rise). Indeed, Instagram grew from roughly 24 million at the time of the acquisition to over 1 Billion users in 2018. Likewise, it earned zero revenue at the time of the merger. This might explain why the acquisition was widely derided at the time.

This is critical from an antitrust perspective. Antitrust enforcers adjudicate merger proceedings in the face of extreme uncertainty. All possible outcomes, including the counterfactual setting, have certain probabilities of being true that enforcers and courts have to make educated guesses about, assigning probabilities to potential anticompetitive harms, merger efficiencies, and so on.

Authorities at the time of the merger could not ignore these uncertainties. What was the likelihood that a company with a fraction of Facebook’s users (24 million to Facebook’s 1 billion), and worth $1 billion, could grow to threaten Facebook’s market position? At the time, the answer seemed to be “very unlikely”. Moreover, how could authorities know that Google+ (Facebook’s strongest competitor at the time) would fail? These outcomes were not just hard to ascertain, they were simply unknowable.

Of course, this is preceisly what neo-Brandesian antitrust scholars object to today: among the many seemingly innocuous big tech acquisitions that are permitted each year, there is bound to be at least one acquired firm that might have been a future disruptor. True as this may be, identifying that one successful company among all the others is the antitrust equivalent of finding a needle in a haystack. Instagram simply did not fit that description at the time of the merger. Such a stance also ignores the very real benefits that may arise from such arrangements.

Closing remarks

While it is tempting to reassess the Facebook Instagram merger in light of new revelations, such an undertaking is not without pitfalls. Hindsight bias is perhaps the most obvious, but the difficulties run deeper.

If we think that the Facebook/Instagram merger has been and will continue to be good for consumers, it would be strange to think that we should nevertheless break them up because we discovered that Zuckerberg had intended to do things that would harm consumers. Conversely, if you think a breakup would be good for consumers today, would it change your mind if you discovered that Mark Zuckerberg had the intentions of an angel when he went ahead with the merger in 2012, or that he had angelic intent today?

Ultimately, merger review involves making predictions about the future. While it may be reasonable to take the intentions of the merging parties into consideration when making those predictions (although it’s not obvious that we should), these are not the only or best ways to determine what the future will hold. As Ebersman himself points out in the emails, history is filled with over-optimistic mergers that failed to deliver benefits to the merging parties. That this one succeeded beyond the wildest dreams of everyone involved – except maybe Mark Zuckerberg – does not tell us that competition agencies should have ruled on it differently.