By Deepa Seetharaman
More than eight years ago, an investor contacted Instagram
co-founder Kevin Systrom to inform him that Mark Zuckerberg was
interested in buying the fast-growing photo-sharing app. Mr.
Systrom's first question was direct: would the Facebook Inc. chief
executive go into "destroy mode" if told no?
That question of how Facebook used its considerable market power
to grow through strategic acquisitions was a big one in Wednesday's
antitrust hearings, with the Instagram deal as the starring episode
thanks to new documents released by the House antitrust
subcommittee.
The allegation from several lawmakers, antitrust critics and
competitors broadly is that Facebook has long adopted a "copy,
acquire, and kill" strategy -- as one lawmaker described it -- when
rivals emerge. The giant threatens to mimic startups and possibly
squash them if they don't submit to a deal. Facebook officials were
taken aback that the House released the documents and posted them
on Twitter, according to people familiar with the matter.
When asked about the tactic during the hearing, Mr. Zuckerberg
said Facebook has adapted features popularized by other platforms
if they are seen as useful to users and said its acquisitions are
successful in hindsight in part because the company invested
heavily in helping them grow. He added that the Federal Trade
Commission reviewed the relevant documents in 2012 when they
examined the Instagram purchase and voted not to challenge the
deal.
Facebook is currently preparing to launch its Instagram Reels
service to take on TikTok, the video-sharing app that is hugely
popular among young people. Facebook is offering some TikTok
influencers cash to switch to Reels, The Wall Street Journal
reported this week.
The Instagram acquisition for $1 billion, considered one of the
bargains of the century, has increasingly become controversial
among those who believe Facebook has gained too much power, and the
documents released Wednesday paint a picture of a company keenly
aware of competitive threats.
U.S. antitrust law is designed in part to block any acquisitions
that substantially lessen competition.
Just a few months from going public in May 2012, Mr. Zuckerberg
was shaken by a new crop of mobile-oriented social-media upstarts
that were nibbling away at Facebook's user base, emails among the
documents released Wednesday show. At the time, consumers were
shifting to mobile phones, an area where Facebook was weak.
In internal discussions with other executives, Mr. Zuckerberg
repeatedly expressed concerns that Instagram, Snap Inc. and other
mobile-first social-media companies could undermine Facebook.
"The businesses are nascent but the networks are established,
the brands are already meaningful and if they grow to a large
scale, they could be very disruptive to us," Mr. Zuckerberg wrote
in a February 2012 email to then Chief Financial Officer David
Ebersman. "I'm curious if we should consider going after one or two
of them."
In an email exchange in February 2012, Mr. Ebersman asked Mr.
Zuckerberg what he was trying to accomplish by potentially buying
Instagram. Mr. Ebersman laid out several reasons for doing such a
deal, including neutralizing a competitor, acquiring talent or
integrating another product with Facebook.
Mr. Zuckerberg responded that it was a combination of the first
and third options. "One way of looking at this is that what we're
really buying is time," he said. Buying Instagram or another
startup "will give us a year or more to integrate their dynamics
before anyone can get close to their scale again." He added: "New
products won't get much traction since we'll already have their
mechanics deployed at scale."
Nearly an hour later, Mr. Zuckerberg sent another message. "I
didn't mean to imply that we'd be buying them to prevent them from
competing with us in any way."
By that point, Mr. Zuckerberg was already contacting friends and
former colleagues about buying Instagram. That included former
Facebook executive and venture capitalist Matt Cohler, according to
the documents. Mr. Cohler, who was an investor in Instagram, then
messaged Mr. Systrom about a potential deal. Messrs. Cohler and
Systrom discussed how Mr. Zuckerberg might respond to being
rebuffed.
"If I make the "leave instagram alone for facebook's sake"
argument, he will conclude that it's best to crush instagram," Mr.
Cohler said in a written message. "I guess there's not much that
can be done about that though."
In private discussions with Mr. Systrom, Mr. Zuckerberg at times
expressed impatience with the Instagram co-founder's reasons for
staying independent. In March 2012, Mr. Zuckerberg informed Mr.
Systrom that Facebook was developing its own strategy for photos.
"So how we engage now will also determine how much we're partners
vs competitors down the line," he said in a chat.
On Wednesday, Mr. Zuckerberg defended his comments to Rep.
Pramila Jayapal (D., Wash.) "I don't view those conversations as a
threat in any way."
Mr. Zuckerberg has always been sharp elbowed when it comes to
protecting Facebook from competition, according to the documents
and people who have worked with him. Over the years, he has told
employees that they shouldn't be "too proud to copy," the Journal
reported in 2017.
In 2013, Facebook purchased a security app called Onavo, which
gave Facebook access to private data showing how apps were
performing relative to others. Onavo data was used to help Facebook
determine whether or not to buy WhatsApp in 2014, Mr. Zuckerberg
said Wednesday in the hearing.
In an internal Q&A in early April 2012, Mr. Zuckerberg
addressed the growing threat of Instagram. "The bad news is that
they are growing really quickly, they have a lot of momentum, and
it's going to be tough to dislodge them," he said in a video
recording. "We have a hard battle ahead of ourselves there."
On April 9, 2012, Facebook announced a deal with Instagram,
which had about a dozen employees and no revenue. It now has more
than 1 billion monthly users and is considered a key driver of
Facebook's growth, though the company doesn't break out the unit's
performance.
In an email exchange the day the Instagram deal was announced,
Mr. Zuckerberg told a colleague that they were right to worry about
Instagram, rather than Google+, the fledgling social network from
the tech giant.
Mr. Zuckerberg added: "One thing about startups though is you
can often acquire them."
Jeff Horwitz contributed to this article.
Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
July 29, 2020 20:33 ET (00:33 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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