Why the FTC Will Attack Instagram in its Case Against Facebook
An antitrust lawsuit against Facebook is forthcoming, and Instagram is in the crosshairs.
Momentum inside the Federal Trade Commission is building toward a Facebook antitrust lawsuit. The lawsuit could drop at any moment, and my biggest worry as I type this is the FTC files it before I hit send, wiping out hours of work.
With the agency all but certain to bring a case, the biggest question now is which part of Facebook’s business it will attack. And the answer is most certainly Instagram.
That’s right — Instagram. When you examine previous big tech antitrust cases, the laws the FTC has at its disposal, and the state of Facebook’s business, it becomes evident that Zuckerberg’s crown jewel is under threat. That’s true even after the FTC let Facebook acquire the app in 2012. And by the time you finish reading today, you’ll see why:
We’re in the midst of a serious rethinking of tech giant power, a radically different environment from when the FTC cleared the Instagram acquisition eight years ago. Today, there’s a near consensus within the U.S. government that the tech giants, through their size and behavior, are harming markets’ ability to function fairly. To that end, the FTC is probing Amazon and Facebook, and the Department of Justice is looking into Apple and just sued Google. After years of inaction, it’s game on.
To bring a case against Facebook, the FTC would use the Sherman Antitrust Act. The act is ancient, signed by President Benjamin Harrison in 1890, but it’s what regulators have to work with today. Section 2 of the Sherman Act prohibits companies from acquiring or maintaining monopolies through anticompetitive tactics. Under the act, there’s a relatively straightforward set of criteria a regulator must prove to win a “monopoly maintenance” case: 1) The company has a monopoly in a market. 2) It’s done something “exclusionary,” using its heft to prevent competition in that market, and 3) Its anticompetitive behavior preserved the monopoly.
To figure out how the FTC could attack Facebook, it’s worth looking at prior antitrust cases against the tech giants. The DOJ first brought suit against Microsoft using the Sherman Act in 1998. In the case, the DOJ argued Microsoft knew the web and its associated middleware made Windows dispensable, threatening its operating system monopoly. So, to maintain its monopoly, Microsoft forced its partners to distribute its Internet Explorer browser, helping it control access to the web.
Last month, the DOJ brought an “almost exact copy” of the Microsoft case against Google, targeting distribution deals again. This time, the DOJ argued that as web browsing shifted from desktop to mobile, Google improperly maintained its web search monopoly by paying billions of dollars to mobile device manufacturers and wireless carriers to make Google their default search engine.
Both DOJ cases hinged on the notion that these tech giants shut out competitors amid major computing shifts that threatened their monopolies. The DOJ won against Microsoft, though it eventually settled upon appeal. The Google case is ongoing.
The Facebook case
Facebook is different from Google and Microsoft. It doesn’t own a major operating system, and it doesn’t have massive distribution deals (at least inside the U.S.). When people want to use Facebook and its family of apps, they must download them. So a case against Facebook would be distinct, though with some key parallels.
With Facebook, the FTC’s best case would seize onto the company’s dominance in social networking, a field Facebook took over after destroying competitors like Myspace in the mid-2000s with a better product (not illegal). The tricky part of Facebook’s history starts in the late 2000s, as we moved to mobile. Facebook’s site worked great on desktop, but the mobile shift caught it flat-footed and it struggled to develop for the phone. To catch up, Facebook bought and built its way into mobile relevance in the early and mid-2010s, and its actions in that time are ripe for an FTC monopoly maintenance case.
The first major place the FTC could look is messaging, especially at Facebook’s $19 billion acquisition of WhatsApp in 2014. Messaging apps, at the time, were starting to build social networking functionality. WhatsApp had a chance to go this route, turning contacts into a version of Facebook friends and adding a feed, so Facebook acquired it before it could. But given that WhatsApp was not in the social networking market yet, and there were plenty of other messaging apps around, this would be a difficult case to bring. The FTC will likely skip it.
Which brings us to Instagram. Instagram scared the daylights out of Facebook because it was mobile-first, had its own feed, and people typically posted photos they filtered with Instagram inside the app itself, not onto Facebook as they did with other camera apps like Hipstamatic and Camera Awesome.
“Instagram can hurt us meaningfully,” Zuckerberg wrote in an internal email in 2012. When he broached the idea of an acquisition to Instagram, its founder Kevin Systrom worried that Facebook would go into “destroy mode” and eventually sold his company to Facebook for $1 billion. The rest is history. Facebook excluded Instagram as a competitor through the acquisition. It maintained its dominance — or monopoly — by buying it. And it still leads the pack by a long margin in social networking.
The case against Instagram is the most robust case the FTC can bring. Anything else would be a surprise. And now, all that’s left do is wait.
This week on the Big Technology Podcast: Homebrew VC Hunter Walk talks Twitter, TikTok, and Tech in the time of Biden
During Donald Trump’s presidency, tech products became explicitly political. Operatives from both sides picked apart their algorithms and features, examining how they shaped society’s beliefs. And the companies, meanwhile, made choices about what parts of the administration they’d work with. Hunter Walk, who spent nearly a decade at Google and is now a partner at Homebrew, has watched the evolutions firsthand. He joins the Big Technology Podcast to discuss tech’s impact on politics and where it goes next under a Joe Biden presidency.
You can listen on Apple Podcasts, Spotify, and Overcast.
Thanks again for reading and listening. See you next Thursday.