Antitrust Lawyer Blog
On August 22, 2012, the FTC commissioners voted 5-0 to close its investigation of Facebook's acquisition of Instagram without any action.
Background
In April of 2012, Facebook, an internet social media platform, announced it would acquire Instagram, the developer of a photo-sharing application and a company with no revenues.
The FTC issued a second request to scrutinize the transaction to determine if Facebook's acquisition of Instagram would harm competition internet social media platforms and in photo sharing applications. At the time the second request was issued, there did not appear too much in terms of actual competitive overlap, however, the FTC appeared to be concerned about potential competition. The issues were whether Facebook's acquisition of Instagram, a potential rival social network, and Instagram's photo app was anticompetitive.
While the FTC did not issue a statement that provides any detail to its decision to close the investigation without any conditions, it is likely that the staff found that the two did not directly compete against each other in the social media space and to the extent there was direct competition in photo apps, numerous competitors exist.
Advertising Competition
Social networks compete to add users and to sell advertising space. Advertisers are willing to pay to purchase advertising space on the social networks' sites and apps based on the number of users that the network has and the information that the networks record on those users.
Prior to Facebook's decision to acquire Instagram, Instagram was growing its user base. From January of 2011 to February 2012, Instagram's user base grew from 1.4 million users to 24 million users. Although Instagram is growing its user base, it does not directly compete with Facebook. To the extent Instagram was competing with Facebook, the FTC probably found that so do other companies. Theoretically, Instagram could have added social media features to more closely compete with Facebook but that might not have been the plan. Google, Yahoo, and Microsoft provide competition to Facebook for online brand advertising and those companies have sites that gather user demographic data. The transaction clearly did not substantially lessen competition in online brand advertising.
Photo App Competition
Instagram provides an app allowing users to take and modify photos and share those photos with other users on the Instagram network or post the photos to other social networks including Facebook. In May of 2012, Facebook launched a photo-sharing app similar to Instagram. Facebook's app has similar functionality to Instagram's photo app. Both apps allow users to apply filters, tag photos, comment on photos, and post the photos on social media networks. Instagram and Facebook, however, face a lot of competition from rival third-party photo apps such as “Camera Awesome, Camera +, Flickr, Hipstamatic, Path, and Pixable. In addition, virtually all smart phones have a photo-app pre-installed. The transaction clearly did not substantially lessen competition in the supply of photo apps.
Lessons Learned
First, the FTC is interested in social network sites and competition for online brand advertising. Second, the FTC will issue a second request to scrutinize the acquisition of a company with no current revenue. Third, the FTC will conduct its due diligence and analyze the various ways that companies compete even if they are not traditional as in this case. A short second request was issued even though there was no evidence that the companies priced any products or services against each other. Fourth, a second request does not necessarily mean that the FTC will require conditions or block a transaction. Finally, the FTC will close a second request investigation if after a further review, there is no evidence of an anticompetitive merger.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com