Without Instagram, Meta is Screwed
We're just at the beginning of Meta's antitrust trial and I suspect things are going to get more interesting as the week – and testimony – rolls on. But the entire thing really is sort of wild in hindsight. Because while it may seem obvious now that the company should not be allowed to buy Instagram and WhatsApp, at the time, in 2012 and 2014, respectively, many people thought Meta (née Facebook) was insanely foolish for doing this, as Mike Isaac recalls today:
In 2012, when Facebook chief executive Mark Zuckerberg cut a $1 billion check to buy the photo-sharing app Instagram, most people thought he had lost his marbles.
“A billion dollars of money?” joked Jon Stewart, then the host of The Daily Show. “For a thing that kind of ruins your pictures?”
Mr. Stewart called the decision “really lame.” His audience — and much of the rest of the world — agreed that Mr. Zuckerberg had overpaid for an app that highlighted a bunch of photo filters.
Yeah, I mean not everyone thought it was a silly deal at the time. As a certain, burgeoning venture capitalist wrote way back then:
People are looking at Facebook’s buy today and thinking “what the fuck?” I’m looking at it and thinking that Facebook is ingenious. They’re one of the few large companies that understands how to and when to acquire. You don’t buy at the peak. You buy on the ramp up to the peak. Instagram as it stands right now is awesome. It’s the tip of the iceberg for what they want to do.
We’ll see if they can execute within Facebook or not. Mark Zuckerberg is saying all the right things. And again, they’ve done great with their acquisitions. I have faith.
[Narrator: they did, in fact, execute.]
Of course, I was biased in a way – I had unearthed the startup before it was even called "Instagram" and ended up being one of the first users of the service which now has... over a billion users. That discovery, in a very real way, led me down the path from being a tech reporter to a VC. So yeah, I was rooting for them. But I also saw the potential of what they were doing. As did Zuckerberg, clearly. Per Brenden Bordelon at Politico:
The government is expected to question Zuckerberg over emails he and other executives sent about the purchases of Instagram and WhatsApp. In its opening statements, the government said the Facebook parent company bought up the competing apps to create a monopoly.
In one such email, Zuckerberg said Instagram was growing so fast that the company “had” to buy it for $1 billion.
“It’s an email written by someone who recognized Instagram as a threat and was forced to sacrifice a billion dollars because Meta could not meet that threat through competition,” said the FTC’s lead lawyer, Daniel Matheson.
Zuckerberg is famous for being a ruthless competitor, but in this case, it feels more like something out of the Andy Grove "only the paranoid survive" playbook. Again, most everyone else not only wasn't taking Instagram seriously, they were literally joking about it when the deal was announced. I'm not sure why you should punish Meta here because their CEO was ahead of this curve. Did he do something illegal or underhanded in gaining this info? This was before Facebook acquired Onavo, the data analytics company which likely did give them the push to buy WhatsApp. But Instagram was different. This particular bet really was ingenious.
So it's a little weird to me that we're both revisiting this and trying to legislate it in hindsight. And I have a hard time believing that the government – and certainly the Trump administration (versus the last one) – is going to rule a deal to be illegal well over a decade after it happened. But clearly Meta is scared.1
And they probably should be. Without Instagram, Meta's business model seems screwed. Instagram has been the lifeboat for the company to still be able to target feed ads to younger demographics – basically still the entire business for the company. Zuckerberg clearly knows Facebook itself is in decline, and it's why he's spearheading the whole "OG Facebook" thing. The Information's headline today around the first day of Zuckerberg's testimony sums it up well: "Zuckerberg Sees Facebook’s Decline Major Threat to Meta".
During Meta’s most recent earnings call last week, Mark Zuckerberg brought up the notion of getting back to “OG Facebook”. He didn’t divulge any actual details on the plan other than to say it was something that Meta would focus on this year and that he himself would devote some time to it. If nothing else, given everything going on within Meta right now, and the AR and AI work in particular, with full-fledged battles either raging or brewing on those fronts, it’s interesting that he’s going to spend any cycles on Facebook, the product.
But it also potentially makes some sense. Facebook remains the key revenue driver for the entire company. While Instagram has clearly been catching up on the business side, and is likely close to, if not past the good old "Blue App" in some ways, Facebook — again, the product — remains a more diversified business with a number of monetization layers. And that matters because it’s both powering and enabling everything else the company does.
If the government were to force Meta to sell off Instagram, the entire company is fucked. That's why Zuckerberg is doing "OG Facebook" – which currently seems beyond silly. He doesn't have a choice though. He has to hedge, just in case.2 Without their feed-based ads business, they have no real way to monetize at scale and as such, no way to pay for the metaverse stuff, let alone AI. If the government takes out more than half of that business, I mean… This is the whole ballgame.
And it should be an easy game for Meta to win. But in this administration, who knows! Better get that checkbook back out, Zuck...
M.G. Siegler
M.G. Siegler
Update: More fun details on Zuckerberg's internal push to buy Instagram via Alex Heath's reporting from Zuckerberg's testimony:
Later in the day, the FTC started to hone in on the Instagram acquisition. Matheson showed internal emails in which Zuckerberg warned colleagues that Instagram’s early rise was “really scary” for Facebook. In other emails, he complained about the slow pace of development of Facebook’s own photos app, Facebook Camera, and described members of the team as “checked out.”
“We really need to get our act together quickly on this since Instagram’s growing so fast,” Zuckerberg wrote in another internal email shown to the court. In a separate exchange with an engineering executive working on Facebook Camera, Zuckerberg tried to instill a sense of urgency: “If Instagram continues to kick ass on mobile or if Google buys them, then over the next few years they could easily add pieces of their service that copy what we’re doing now.”
In court, Zuckerberg downplayed the threat Instagram posed to Facebook at the time. “Yeah, of course,” he said in response to Matheson asking if both apps were competing to connect friends with each other. “Was that the main thing that was going on? Not to my recollection.”
1 It's possible that Zuckerberg and crew simply didn't want their private communication to spill out as a result of this trial, leading to what will undoubtedly be more press headaches.
2 Might the unbundling of Reels play into this as well. Certainly, Meta would have an easier time arguing that Reels is a TikTok competitor (versus a "social networking" competitor) if it's not a part of Instagram...