As anticipated first on this blog (see here and here), the Facebook/Instagram transaction is undergoing Second Request (i.e., serious) scrutiny by the antitrust authorities.
It should be clear that the transaction does not meet the government’s burden to challenge a transaction, but there is a serious concern in how Facebook handles this investigation in how Facebook will be scrutinized in the coming years. Think of Google’s pervasive antitrust issues.
The problem for the parties is that statements in documents take on disproportionate importance in such investigations, and both parties have likely made the type of statements that catch regulators’ eyes. In Facebook’s case “Instagram is a threat to our photo-sharing” and in Instagram’s case “we can be the next great social network.” There is nothing wrong with these statements, but seen by regulator’s eyes, through the frames of antitrust, the wrong implications are drawn. In addition, analysts like myself noted when the deal was announced that the effect of this acquisition was to take over something that was taking a lot of Facebook’s buzz by being a better photo-sharing experience.
The real issue should boil down to whether the acquisition is likely to help Instagram achieve its potential by further accelerating its use and by finding a way to monetize it (then the deal should be approved) or whether Facebook is doing the deal to squeeze out a potential competitor. Startups often need to be handed off in order to continue their disruption; think of Amazon’s acquisition of Diaper’s.com. Ultimately, in the US, the government has the burden of proof and I don’t think there is any way at the end of the investigation the government can make a case that stands up in court that the deal is merely to squeeze out a potential competitor and there will be a specific cognizable competitive effect that rises beyond speculation.
Ultimately, the most serious threat for Facebook is whether the FTC begins to contemplate, or even imposes as part of its approval here, requirements that Facebook should be treated as an essential platform that must remain open to competitors such as other photo-sharing services, Twitter, Foursquare, and others who have used the Facebook platform to promote both themselves and Facebook. If so, Facebook could face full-time scrutiny of attempts and accusations of favoring its own services by regulators around the world. This is the direction in which investigations of Google have gone. For example, see the EU statement regarding Google here.
Facebook’s arguments now, like the butterfly flapping its wings and causing a hurricane weeks later, will have mega-consequences down the road. They should take them very seriously. For further background and analysis, this is a good time to re-read my series of posts on new economy platforms and antitrust including here and here and here and here.
takingpitches 