Big Technology Podcast - Will the Government Break Up Instagram and Facebook? A Conversation With ‘No Filter’ Author Sarah Frier

Episode Date: November 25, 2020

The Federal Trade Commission is preparing an antitrust lawsuit against Facebook, and Instagram is in its sights. The agency is poised to revisit Facebook’s 2012 acquisition of the popular mobile app, and a long fight may await. Bloomberg reporter Sarah Frier wrote the most in-depth account of Facebook’s Instagram acquisition in her April 2020 book No Filter. She joins the Big Technology Podcast to tell the story of what happened and what may be in store next.

Okay, wait, what's your dog's name again? Marlowe. Marlowe. Okay, we'll have to give Marlowe a shout out if he starts barking during the episode. We will. Hello and welcome to the big technology podcast, a show for cool-headed, nuanced discussion of the tech world and beyond. Our guest today is Sarah Fryer, a Bloomberg reporter. who covers Facebook and is the author of the hit book, No Filter, The Inside Story of

Instagram. And when you finish listening today, I think you're going to see why Facebook is in for some real trouble with the Federal Trade Commission from an antitrust standpoint. But first, let's welcome Sarah to the show. Sarah, welcome to the Big Technology podcast. Alex, thank you for having me. I'm really excited to be here. Yeah, it's great having you on.

I hope we'll be able to have you on multiple times. I was looking forward to getting you on the show. I felt like this was a particularly opportune week. but I'm thrilled to have you here. It is, it is a, you know, we got the rain going. It's perfect time for a podcast. That's right. That's right.

So you've been with Bloomberg. You've been a reporter at Bloomberg for a while now, almost a decade. And you joined in 2011. So I just want to start off with a question. Like, when you joined, did you think your beat was going to turn into something that's going to be dealing with like election integrity and antitrust that sort of change from what you originally anticipated? I really think that the beat has completely transformed.

Like my job is 100% different than it was when I was covering Facebook's IPO. I remember the big question around Facebook's IPO was, are they ever going to make money off of mobile advertising? And the big question around the Instagram acquisition was, why did they pay a billion dollars for this app that had only 25 million users and no revenue and 13 employees? And so I think the questions just for many years, maybe even up until the 2016 presidential election, those questions certainly started taking shape before then. The questions were about business, right? It was how's the revenue trending? Are they getting into this new business line? Like, how are they competing with Google? How are they competing with Twitter? And the thing that I really wanted to focus on in my book, Those kinds of questions are not the most fundamentally important ones anymore. This is now a story of the new infrastructure of our society. These companies are not only shaping how we interact online, but especially in the case of Instagram,

how we behave in the world at large, what we value, what we buy, how we hang out with people, how we celebrate what we aspire to, how we build businesses. All of those things are wrapped up in the product decisions that are made in Menlo Park, California, at Facebook or in San Francisco, Twitter. In this case, during the COVID pandemic, we have people making money from home. I just think that the scope of the beat, as you've experienced, has really

become almost like like covering government entities but in some ways more powerful. Yeah, it feels like there's been like a few stages. Like the first was,

oh, these companies are interesting and their products seem fun. What's going on here? And the second was there's like the second stage which was these companies just keep getting bigger and bigger and bigger and like the rocketing growth I think was the interesting thing because we knew

that there was going to be an impact on society, but didn't quite know what. And I think we're now fully into the third stage, which is the impact on society. And, you know, when you're watching these companies, you end up being confronted with some more interesting questions in terms of what's the actual impact on the way that we live, what's the impact on competition, and what's the impact on the world at large. And so it does lend itself to more interesting questions, which is both an adventure. It can be exhausting at times because I feel like you always have to learn something new. But it's so it can be, I think it's the most fascinating beat in the world right now.

So it's good to be able to have you on and talk about some of the more pressing issues that we're going to see moving forward. Thank you. Yeah, I think it's, it's really important for users of these products to understand the, the structure and motivations of the people behind them. because then you can you can kind of peel back the layers of what's happening and understand why our political discussion is as fraud as it is, why white people are seeing this sort of divisive behavior and in politics and beyond it all comes down to the decisions that Facebook has made and Twitter has made and Google has made about how to build.

Yeah. And so you wrote No Filter. First of all, let's just talk about the title. It's an amazing title. Was that something that was evident to people from the start what you were getting at? Sort of No Filter. Obviously, people when they tag their photos, hashtag no filter, it means they haven't used any gloss over it. And to me, I think it connotes that you're going to get at the real story without any big PR releases or spin. It's just a great title. Was that something that people sort of picked up on from the very beginning? It was actually hard to convince my publisher to like that title. Eventually, everyone thought it was great. But in the beginning, it was like, should we really, does everyone know what that means? Is that like a Trumpian thing? They're going to think it's about Trump because he has no filter. I think generationally, if you're an Instagram user, you know what no filter means. But the way I see the title, it's like a double meaning.

It's no filters and not, the fact that we know that. that phrase is a nod to the cultural impact of Instagram. No filter also refers to the fact that my reporting is not what you're going to read in a press release or the official story you've heard. Because the official story of Instagram, as you know, before my book was basically that Instagram was a happy company within a company that had this harmonious post-acquisition relationship with Facebook where they got to be kind of independent and Facebook was was even able to acquire other companies like like WhatsApp and Oculus because the Instagram legends,

the idea that they were able to buy something and just keep it independent and succeed was so appealing to a lot of founders who thought that if they joined Facebook, they could have none of the risks of running a startup, but all of the rewards of still being a founder, still being a CEO and having control. Right. And today we're going to actually talk more about the run-up to the deal, which I think is important given the action from the Federal Trade Commission that we might see. But before we do, I just want to say, you and I shared an editor for a bit. Our books, my book, always day one, and your book, No Filter, came out in the same month. We were competitive in a sense, and it was a really tough month for the books to come out.

But I feel like it was amazing to see how, you know, we were able to talk it through and compare notes and you were incredibly supportive of my book. And I hope that you felt the same way of me with yours. And it was just great to have, you know, someone to go through this with. And I just wanted to say, thank you. I feel like, you know, going through that on your own. I mean, obviously we didn't suffer the worst of the pandemic, but releasing in April, you know, at the height of this thing, in the beginning was tough. And so just... And it was hard. It was hard to complain about it because people are literally dying.

There are worse problems, right? There are conversations that are more important than the conversation that you and I wanted to have in that moment after all of this work that we've done. So it was really great to have you because I could just say, okay. Are you feeling awkward about this? Yeah, like on release day, should we tweet that the book is out? Like, these were tough conversations. Should we still have life? Yeah.

Exactly. So, so yeah, for those listening, Alex and I had a Zoom beer session and just kind of talked out strategy. Yeah. And it was just great to sort of be able to discuss to see, hey, someone else is going through this as well. You know, we put a couple of years of our lives into writing these books. And then, of course, you get all excited about the timing.

And then the world sort of takes that away from you. And so just being able to speak with you about it was so helpful. And I'll forever be grateful. So thank you, Sarah. I feel the same. I feel you're the best. How are you feeling about the way the book is going, by the way? Well, you know, there's a difference between the reception for a book and an article.

I think one of the hardest things about writing a book is you don't get that constant feedback loop of reporting a scoop, people telling you what you missed or people telling you what the next step is. And when you tweet something, you get that instant feedback from your audience and of course from the company itself. But with a book, and I'm sure you experience this too, you're kind of just having that conversation in your own mind. you had your color-coded post-it notes. I had my note cards, just trying to figure out how to piece all of this together and make a web of it. And so it is really cool to see when a book comes out, the longevity is a lot more than an article. It's an article people kind of, you know, it becomes part of history.

but it has an inevitable fade and journalism is always about finding out what's next and books are about finding out why something happens and how it happens and what it means and those questions are are not ephemeral. They are their lessons that we can learn from and things that can shape are thinking about the future. And so I'm sure you've seen this too. It's just been it's been cool to see like the kind of steady, uh, word of mouth and appreciation for understanding what's behind these companies that are getting ever more powerful. Yeah. And I think that in terms of longevity, I mean, your book is going to be something that people are going to be talking about for a long time. And it's sort of the reason why I thought this would be a good week.

for us to talk because it does seem to be that we're nearing a moment where the FTC is going to bring a lawsuit against Facebook and all signs point to that lawsuit, looking back at the Instagram acquisition and trying to see whether or not Facebook illegally maintained. It's monopoly. And I feel like maybe this conversation that we're going to have today is going to be a preview of one that you're going to have over the next two or three years as this action gets going. Now, I mean, mean, I'll say this with the caveat that, you know, I'm not 100% certain that this is where it's going, but I feel pretty good about the direction. And I'm just going to set the stage quickly. So there's a reason why Facebook is going to show up in front of the FTC in a lawsuit

and Instagram seems to be the likely case. And the reason is just because of the laws that we have today that govern monopolies. We're looking at. a law back from the 1890s called the Sherman Antitrust Act that was signed by Benjamin Harrison. It's an old clunky law. It's not very good for the use of, for looking into tech monopolies, which you point out in your book, Sarah. But there is this section two in the act, which looks at whether a company illegally maintained or sustained their monopoly. And in the section, in the second section, there's basically three things that the FTC needs to prove to show that there was a legally maintained monopoly. The first is that there's a monopoly. The company has a monopoly

in some market. And for Facebook, you would probably say social networking is the monopoly. Now, the next two are where it gets interesting. The second one is that it's done something exclusionary, which means it's used its heft to prevent competition in the market. And that might be where you get to the Instagram acquisition. And then the third part is that the anti-competitive behavior preserve the monopoly. So did Facebook acquiring Instagram help it preserve its monopoly in social networking? And I feel like that's the next, that's the thing that I'd like to get into with you, Sarah, as we, you know, spend the next few minutes with each other, or not next half hour, really. So I'd love if you could bring it, you detail this great in,

in no filter, in real depth. But can you bring us back to Facebook at the time of the acquisition of Instagram, where was Facebook at the time of that, of that acquisition and how did

the Instagram threat merge to Facebook? Facebook was really struggling to understand how to build its product

from mobile phones because essentially they started with a desktop app and then they were trying to cram all of those features from their

desktop app into a mobile app and it was not that, not very functional and they didn't know how to make money off of it. And that was like a very existential crisis internally at Facebook. Can we figure out mobile, how to develop there, what works there? And Instagram was like the key app on the iPhone. Like it was something that was so naturally intertwined with how people would use their phones. Instagram didn't even have a web that for a long time because the point of it was that you were out in the world, you had this

camera in your pocket all of a sudden, and you wanted to use it and use it in a way that was fun. And Facebook at the time could see the popularity of Instagram really easily because Instagram had the ability to cross-post to Facebook and to Twitter and to Tumblr and Forest Square and all these places. So Instagram filtered photos were like everywhere on the internet. And Facebook could see that activity really start to, um, to be popular. And, and they wondered, like, is there a way we can, can capture this? And then they also, they also were concerned that that Twitter was interested in acquiring Instagram. And Mark Zuckerberg knew that Kevin Sistram had a close relationship with Jack Dorsey,

the CEO of Twitter. Kevin Sistram's the CEO of Instagram. Jack Dorsey was actually an angel investor in Instagram and his post about, well, he he helped build it not engineering as a user. He helped build it by essentially being the first Instagram influencer. He was he was posting about Instagram on Twitter and he was one of the highest followed people on Twitter being the co-founder and his endorsement for Instagram led a lot of cool people to go start using it. And that made the content on Instagram really good. And it made it, it had this sort of

cultural cachet to it because Instagram was really all about like the creative community, finding the right people, the right kind of content on the app. Unlike, unlike Facebook where like more is more, growth is good. Like bigger is better. Instagram was really about like the tone of the content, the feeling that you get when you're there, it had to feel curated. It had to feel almost magazine-y to be on Instagram. Yeah, you have this line in your book. I think it's Facebook was a constant class reunion and Instagram was like a constant first date.

Is that, that's from no filter, right? Yes, that's, yeah. That's a great line. That's a great line. Yeah. It's really just because if you think about how Instagram works, it is a place with no resharing and it's image-based. So everything that is on your profile is something you have created.

Unlike Facebook, where, you know, something you post could be a link to somewhere else or it could be a comment on someone. Instagram was just pure personal brand. And the idea of a personal brand was not, it is more just like, here's my visual scrapbook. And a lot of people thought, like, why would you need this? We have Flickr, we have photo bucket, we have all these things. Why would you need this on mobile cameras and even mobile phone cameras don't even take good pictures?

But the Instagram, the Instagram service was, was gaining traction, gaining a network unlike any of its competitors, pick, please, hypostomatic. Yeah, this is a point. Yeah, I want to key in on this. Sorry to jump in here, but I do want to key in on this because Facebook, as you mentioned, had built this, what looks like you could call it a dominance, maybe a monopoly. that's going to be something we're going to debate for a while on desktop after it crushed all the competitors such as MySpace. But then mobile comes. And you see this emergence of all these

different camera platforms like you're talking about camera awesome, hip somatic, Instagram. But I feel like something made Instagram different and you might have just touched on it, which is that for the other camera apps, people would basically filter photos and still post them on Facebook, but Instagram had a feed. So how did that make Instagram a unique threat to Facebook? Well, it was a destination. And every Instagram created post was essentially an advertisement to go download Instagram. If you saw something cross posted to Twitter or something cross posted to Facebook where there was sharing and by rally and it said this image, the way this person got this cool, nostalgic filter on their images through Instagram, it grew off the network that Facebook

and Twitter and Tumblr, et cetera, had. And that was something that Facebook thought was, we just can't have, you see this over and over in Facebook's antitrust history. We just can't have someone using our network to become a competitor. Like, that's something that, we want we want dating apps we want you know Tinder and Bumble to connect with Facebook until

we don't until we feel like we want people to use Facebook for dating you know so so I think that that was one of the early early senses of that the other thing that is worth noting Mark Zuckerberg really

understood how to talk to founders And I think that he pitched this idea of independence for Instagram and a way to be a founder and have an exit and have all that security, well-maintaining the control. And so he sort of said, like, let's join forces so we don't compete. And I think that Instagram was thinking about it the same way. if we get acquired by Facebook, we essentially eliminate one of our top future competitors. Some of the stuff that came out in the House Judiciary Antitrust Committee was that like, Cisterome is like, well, we either get acquired or Facebook goes into destroy mode and crushes us.

Right. It was like a non-option. They were growing off of Facebook's network. So if Facebook just cut them off, like who's to say Twitter wouldn't cut them off after declining Twitter? whatever's acquisition offer. And then it would just be so hard. I think that that was the big stick that Facebook had to wield. The other thing was the network effect that Facebook was concerned about. When you look at the landscape of the photo products, some of them did have feeds, but Instagram was the one that had the network effect.

And that's like the exponential growth of people joining. You had celebrities on Instagram. He had before the Facebook acquisition, you had Justin Bieber on Instagram. You had Barack Obama on Instagram. You had Kim Kardashian, Taylor Swift, all these people who would go on to use Instagram to become even more famous. Yes, maybe with the exception of Obama, he had other means. But it certainly gave this, it gave this cachet of like being a part of our culture that Facebook didn't really have. have. Facebook never attempted to

co-favor with the top users of its platform in those early days. They were more focused on the size and the numbers and not the top influencers, I guess I should say. So they saw something unique in Instagram and that's why Mark was able to tell Kevin, we'll let you be, we'll let you grow on your own. Yeah. And this is an important point because Instagram was building itself off of the networks of Facebook and Twitter,

but also it became this destination into itself. So Facebook couldn't get its act together with its mobile app, which it did eventually, but not after some fits and starts. It risked losing its basically hold on the world of social networking to this app that people not only went to to filter photos, but they went to to see what people were posting. And that was a real threat to Facebook, wouldn't you think? The most telling sign that, of course, you know, we've seen the emails. We know that Facebook has now said publicly, of course, we of course we acquired Instagram because it was competitor, but that's not the only reason.

They joined Facebook, so it took a few months of deal approval. We can go into that later. But they joined Facebook. And before Facebook lent them any resources, this was like. Like, just imagine the Instagram team, tiny, tiny team, just 13 to 15 people, hard to hire over the summary because people didn't know necessarily what they would have at Facebook, what they wouldn't have. They weren't a lot to coordinate about what their team would get in terms of resources

and just exponential growth. And it was crushing them. And they joined Facebook a few months, like six months after the deal was negotiated. and the very first week, Facebook's growth team takes the one Instagram growth guy out to lunch and says, hey, so we have to do a study. We will help you grow, but we have to do a study first to make sure that you aren't the reason that photo posting is going to decline on Facebook. So as long as you're not a threat to Facebook, we'll give you resources. which was just kind of crazy because then that goes to show.

They bought Instagram with the intention of helping it if they thought that it wouldn't crush Facebook and killing it if they thought it would. Right. So it was evident right from the beginning. Yeah, this is a competitor. We can't have that. Do you know when Facebook- We have to either own it or not?

Yeah. Do you know when Facebook decided it was going to buy Instagram? I mean, it looks, you know, from the text, it looks pretty abrupt. Like one day Zuckerberg's like, yep, I think. think we should buy them. And then Zuckerberg goes to Kevin Sistram, and he's like, I've decided to buy you. But was there like a compelling event or a moment in Facebook history that made them decide we need to make this move? Well, yeah. I mean, I think there was big concern that Twitter was going to buy them. And Instagram had just raised a ton of money in a funding round. And they were

going to have a ton more resources to grow. And so before anyone, before they were able to turn up, dialed up to 11, they had to figure out how, how Instagram was going to fit with the future. They could see that it was about to have this like, this exponential moment. And they had to put it in, in some strategic position for them. Right. They had raised, like, I think I'm quoting from the book here, but correct me if I'm wrong, like $50 million at a $500 million valuation.

And then Zuckerberg goes. Which was huge at that time. Like that was crazy. Facebook had 100 million, 100 million valuation if I, if I, 100 billion. 100 billion. Yeah. But for a camera app, quote unquote camera app, it was a lot of money. And Zuckerberg immediately goes to Sistram.

I'm going to give you double. Yeah. He said, I mean, to give you 1% of Facebook for this. Kevin Sistram, by the way, at first asked for $2 billion because he didn't want to sell. Might as well. Right. Yeah, he didn't want to sell. And he had discussions with Twitter. And even in private messages that are now public talked about how Twitter was a better fit and how Jack Dorsey had been this. We talked about had been this influential user. And I think there was like this dispute also where it's disputed now.

But I mean, it seems like it happened that Twitter actually drew up an offer sheet for Cistram for Instrum, for instance. Instagram somewhere in the $5 to $700 million range and Sistram turned them down. So, I mean, the thing that I wonder as I read through this whole saga is, why the hell didn't they just sell to Twitter? It seems like they knew it was a, they thought it was a better fit. They seemed afraid of Zuckerberg in some ways. So how did Facebook pull this off? The thing that Instagram really needed was not what Twitter had.

Twitter was, at the time people thought Twitter might end up being as big as Facebook. It really wasn't as obvious that they would remain so small. That's one of the reasons why people were disappointed in the couple of years post IPO with Twitter. But at the time, they were pretty equivalent in people's minds as powerful platforms that were growing really fast. And the thing that was happening on Twitter all the time was it was just going down. And it had a lot of internal drama at the top. And they didn't have a really strong engineering core. Instagram was also going down all the time.

If they had joined Twitter, or at least they were having to fix the app all the time, if they had joined Twitter, that wouldn't have helped them in their biggest problems. Whereas at Facebook, Facebook was known for having really good infrastructure. And Mike Krieger, the co-founder and chief tech. officer of Instagram really respected their engineering chops and he was like waking up at at 4 a.m. all nights of the week to deal with you know the network alarms. He was like okay this it was exhausting they were exhausted and it was not clear that if they joined Twitter they would fix those problems and Twitter also um they had a vision for Instagram that that was more like well

we just want to bring you in we'll figure it out later like maybe kevin you could even be head of products at twitter um you know we'll see we'll see what happened there was not it was like take you want this money because we'll just get the money to you and then we'll figure it and it just wasn't a compelling emotional offer the way the way facieck made it or even threatening the way facewick made it like you're with us or against us yeah right which is basically what Zuckerberg did when he went to Sistram, at least the way that it reads. So how did Zuckerberg close the deal on Instagram? Well, he appealed directly to Kevin, and then he wrapped it all up in a bow over Easter weekend

without any external bankers. And it took about three days, all told. They had a really quick review of Instagram's code, which just involved calling Mike Krieger and asking him a few questions. He never even looked at the code. Right. Krieger, I'll just keep going back to your book, but Krieger said, we could have built this thing on Lego and they wouldn't know. God, that was one of my favorite lines. Yeah. Yeah, it was just like, we know what we want. We're going to get it. And there were a few scuffles about, you know, what percentage would be in stock versus cash. And again, these guys were exhausted. Like, a little cash goes long way when you're not exhausted. and then done.

And Facebook's board was barely addressed before the ink was dry on the paper. It was a fast process. And that's partly because Zuckerberg didn't want any time for Kevin to just ponder it, to get cold feet. He just wanted to make it happen. Yeah. Okay, and now we're going to get to the key question here, which is we talked a little bit about how, or I talked a little bit about how the second important thing that the FTC would look at with Facebook is whether it's done something exclusionary to prevent competition in the market. How did the acquisition of Instagram by Facebook change the nature of competition in social media?

It meant that one company would end up owning the first and second most popular. popular social networks in the world. It's just astounding. Like, if Instagram remains separate, maybe they would have a trajectory like Snapchat. Maybe they would have fizzled. Maybe Facebook would have killed them. Maybe they would have joined Twitter or Google or Apple, any number of companies. And the way that we are living today would be different.

Yeah. Would you say that the acquisition sort of helped Facebook, like, put a stranglehold on the social media world from then on? Yeah. I think that Facebook didn't even realize it in the beginning. I think initially, they thought of Instagram as, like, it's, hey, it's really great that we were able to get this competitor to be part of our company and part of our corporate situation. but they didn't really think of it much strategically beyond that. And then Zuckerberg did see that they were able to use that whole independence of Instagram to appeal to other founders like Yon Kuhm of WhatsApp saying, oh yeah, you know, let's try it out Kevin Sistram to have dinner with Yon and tell Yon that everything will be fine, which they did. And Yon was deciding between selling WhatsApp to Google or,

Facebook and pick Facebook. So that's huge. The fact that Facebook also owns WhatsApp. That was a that was a 22 billion dollar acquisition. So in the beginning, it was, it was strategic in that way. And then once Instagram launched stories, it became a lot more frequently used. Its growth actually accelerated, which is rare for a social network, for growth to accelerate. And then Facebook started to feel.

actually threatened by the company that they owned. Like, they had brought them into the fold, but still they could see that question that they asked at the very beginning with Instagram, like, are they cutting into the potential that Facebook has for photo sharing? They were highly concerned about it. And so Zuckerberg made Facebook do stories

and WhatsApp do status and messengers try the same. Like, they wanted it to go everywhere just to like, Zuckerberg thought that Instagram was only successful with stories because they did it first and that was eating into Facebook's opportunity. It got really tense and this was right

after the 2016 presidential election when a lot of scrutiny of Facebook was cropping up and Zuckerberg was thinking I don't actually believe that people are hating Facebook because they don't like it. We see

the user numbers. They're good. But maybe they have this, like, alternative option with a much happier brand that they're going to. And we are sending them there. We are literally advertising Instagram all over Facebook. Every time someone posts an Instagram on Facebook, we say, check it out on Instagram. We should kill that. We should stop it. We should instead make it so that people on Instagram get redirected to Facebook.

Right. It must have been this weird emotion where it's like, we've created something that people like more than, my baby, you know, from Mark Zuckerberg standpoint, but also, man, thank God we bought this company, because if this was happening with somebody else owning it, maybe Twitter or maybe Instagram doing it standalone, then there would be some deep trouble for Facebook. So when we come back, we're going to take a quick break. When we come back after the break, I want to talk a little bit about where we stand from a regulatory standpoint now that Facebook does own Instagram, how the FTC let the deal go through and what it might do.

you know, to potentially unwind it. So stay tuned. We'll be back here with Sarah Fryer from Bloomberg and the author of No Filter, the inside story of Instagram right after this. Hey, everyone. Let me tell you about The Hustle Daily Show, a podcast filled with business, tech news,

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So search for The Hustled Daily Show and your favorite podcast app, like the one you're using right now. And we are back here on the second segment of the big technology podcast with Sarah Fryer, Bloomberg reporter and author of No Filter. We've talked a little bit about how Facebook, or I guess a lot about how Facebook has built such dominance through its acquisition of Instagram. And now the FTC might examine it and think about potentially even unwinding it or finding a way to, you know, create room for some other competitors. One of the big questions I think we're going to be asking is, how do the FTC let this deal go through? And it seems like they let it through pretty breezily.

So can you take us back to that moment, Sarah? Well, Facebook was making these arguments. This is 2012. Facebook has just gone public. and its stock is cratering because investors think it's never going to make any money on mobile phones and they want to spend $1 billion

on this tiny company that has no revenue and they fail to see the key thing that we talked about at the beginning of this episode, the network effect. The fact that Instagram was already winning that market and of course Facebook didn't take any pains to really dwell on that fact that that was part of their

their rationale for buying Instagram. Instead, they said well, you know, I don't think we even know if this app is very dominant. You know, we don't really, it's just one of many camera apps. We don't have a camera. We are building our own

camera app and this is another one. And you could also do Hitsomatic or Camera Plus or Path or camera awesome or pick please. There were all these other apps that they listed and talked about and said, well, you know, we are just, we just have no idea if

this is going to work out. There's no revenue here. So the FTC was kind of just like, okay, that sounds, it sounds on threat. Like, we have, we have no reason to stop this. You guys are, we don't even know if you guys are going to survive the next few months. And, and that was, that was great for Instagram. Zuckerberg didn't, even go to D.C. to be interviewed by the FTC. He did it via video call, which video calls are very common today, but pre-coronavirus. And Kevin's sister in what he went to, to be interviewed about the app at the FTC. They had like really junior people talking to him. And they were like fanboys of the app. This is so interesting. Tell us more about how it works. And and also, and this is

common in technology deals, but I was really shocked by this. The people doing the discovery on the, sort of for the, for the FTC report so they could see what, uh, what was potentially concerning within the text messages and emails, etc. The documents that they gathered from Facebook and Instagram, it was Facebook and Instagram lawyers. We're doing that discovery. Right. And they were asking, they were asking questions like, you know, Kevin bought one of his employees a nice bottle of bourbon to celebrate the fact that Instagram had passed Facebook and App Store popularity.

Does that mean that Instagram is a competitor with Facebook? And the employee answered, well, I think any app would be happy to pass Facebook and popularity. and that was that. And that interview was done by Instagram's lawyers. So I think that it was just kind of small potatoes. Right. And they let it go through. And so here's a question for you now, given the state that we're in.

So if the FTC can show that Facebook had a monopoly in social networking, that it did make this acquisition in order to prevent competition in the market, which seems like it might be able to do, and that it preserved its monopoly. social networking. That also seems feasible. Does the FTC have the capability to unwind a deal that it approved? Well, if you look at the approval letter, they gave themselves an opening to come back to it. They didn't say like, this deal is approved forever and ever. I forget the exact wording, but it was something like we have no, we have no reason to block this at this time. And so I think

that, sure, they can do whatever whatever they want. I think that when we get to talking about something like a breakup, which is what is always top of mind in these discussions, like, what if you just separated it out into its own company and everything

would work out from there, as you and I have seen, Facebook has really quickly over the past few years, especially since the Instagram founders left in 2018 out of frustration with Zuckerberg's restriction of resources.

We've seen Facebook decide to intermingle their apps. Maybe in a way that that makes it easier for Facebook to operate them, but is maybe not in the best interest of Facebook's users. And we're seeing it happen right now with messaging, where you have Instagram direct combined with Facebook Messenger. They're eventually going to add WhatsApp to that. Zuckerberg is trying to create a mega network out of all of his different networks. So you can decide, like, maybe Instagram's your favorite platform,

but you can still interact on Instagram with everyone who's on Facebook. And you can interact with merchants who use WhatsApp. And that would give them more power because what Zuckerberg thinks, which I'm not actually sure that I think this is the most important thing, but Zuckerberg thinks the bigger the network, the more valuable the network is to people. Yeah, it depends how you structure it. Sarah, do you think that this integration that we've seen bringing the apps together,

do you think that's explicitly meant to fend off a breakup from the FTC, which has the power to do it? I don't think it's specifically meant to fend off a breakup. I think it's also because Facebook wants to have product control over these, I guess I should say operational control. Like, it just makes sense at scale if you are dealing with something like election integrity or if you are dealing with something like, you know, legal or or HR or something. You want those things to be centralized and help all the apps because then you have just one team that deals with everything. And previously you had like a head of growth at Instagram and ahead of growth at Facebook and, you know, there were some, there were some kind of messy reporting structures where people would report to a boss at Instagram, but also report to the Facebook team that was somewhat like the ads team on Instagram also worked closely with the Facebook ad team, but maybe reported to the Facebook ad team because Facebook didn't want Instagram to just build its own ad system because that just wouldn't. They would make it harder for advertisers to buy. So I think that this is just all in the name of moving faster to build stuff.

The problem that you get, at least the problem I see from an antitrust perspective, or the problem from a consumer goods standpoint, is that when you have Facebook in charge of all of these networks that Facebook considers to be smaller and less important than Facebook, imagine where the resources are going. They're restricting resources for Instagram. They're not letting them hire all the people that they wish they could to solve their problems. And in fact, Instagram's problems become secondary to whatever is getting attention in the news for Facebook.

And Instagram is an intensely influential network shaping our society just as much if not more. and the AI systems that are rooting out problems on Facebook, they don't all transfer over it. The argument that Facebook is making, and a lot of its arguments against a breakup, is that it's safer for them to have all these products together because they can find, like, fraudsters and, you know, terrorists and child pornographers across all the networks.

And if you combine their identities, then you know. what's out there and can solve it. But in reality, Facebook gets the priority. That network gets the priority. And everything else gets too big for help. Yeah. If Facebook were to make this argument that, hey, we can't unwind this. It's already too integrated.

Do you think that that's true? Or do you think they could actually unwind it if they were forced to? It would take years. I mean, they wound it so they can unwind it. Yeah, right? So it's sort of going to be like, I don't know, can you see a situation where the FTC does unwind the two companies? Sure. I mean, but I think that we, okay, the antitrust side of the FTC is different than the side that worked on the privacy issues.

But look at what happened. Like, the FTC doesn't have a lot of things right now. If you look at what happened in the privacy case that they brought against Facebook. after Cambridge Analytica, the penalties were $5 billion for Facebook, which has more than $70 million in annual revenue is like, sorry, 70 billion in annual profit. Not very harmful. It is just not, not much.

And then you have all of these measures of things, like all these issues that Facebook needed to resolve and every single one of them was something that had previously appeared in a Facebook press release as something they were already doing. Yeah. So you don't really see a lot of hope for the FTC making a real dent here. Well, it seems pretty clear to me that that case operated with a lot of backroom discussions. I don't know if you saw the documents that came out about it, but it was like, it was like, hey, when should you? we schedule a time to talk on the phone? Like most of the documents for like not actual negotiation happening and writing.

So Facebook learned their lesson a little bit on that front. They did. They did. Slowly but truly. Yeah. Yeah. And there was a lot of a lot of negotiation to do something that would make the FTC look good, but not be too harsh on Facebook.

Yeah. Because, you know, as long as they can say they'd. They gave them the biggest fine ever in the history of the FTC. They can say they laid the smackdown. Yeah. So I want to conclude with a couple of forward-looking questions. First thing, first, given the discussion we've had about the acquisition, Instagram acquisition and the impact on competition,

and we know the FTC is looking into Facebook in a big way, okay, maybe there's not a breakup. where do you see this concluding? Where do you see it going? Well, I think you need to not just think about the FTC. There's also Congress, which put out a almost 500-page report on the tech companies and their anti-competitive practices and trying to come up with legislation to limit them. You have the DOJ, which is also working on a Facebook case.

You have state attorneys general who are likely going to join the FTC. FTC case, which could make it more powerful. And so I think that this is not going away. If Facebook is going to try to lobby one group or the other, I'm very curious what will happen in a Biden administration because already you've seen a lot of folks who were previously in the tech industry try to enter positions to regulate or at least think about regulating the tech industry. Biden, a Biden spokesperson this week said that Facebook is shredding the fabric of our democracy.

However, like... Yeah, they're just mad about ad policies, though. They know these people. They're, in many cases, are working with people who had worked at these companies or Facebook has hired folks who used to work with them. It's the same thing that happened with Facebook and the Trump administration. they hired a lot of heavy hitter Republicans and they were able to make Facebook seem very friendly to power and just a little, a little schmoozing goes a long way. Yeah. Okay. And then let's just talk about, so that will definitely be ongoing and personally, you know, just to the listeners out there, I would say keep your antennas up because a lot of the stuff we talked about today is probably going to come out. And this, hopefully, this discussion hopefully provides some context on that.

And now, Sarah, just from a product standpoint, you mentioned Instagram taking a lot of the momentum away from Facebook. It seems like it's everyone's favorite app compared to Facebook. So from a product standpoint, do you think Instagram supersedes Facebook and makes it irrelevant? Do you see another company coming out of nowhere and starting to challenge this lead? Where do you see sort of the product game going in the social media world? Well, here's a clue. Facebook hasn't given us a user metric for Instagram since 2018. They didn't even want to say it in 2018 that Instagram had a billion users.

We have no idea how many users they have right now. That's something you should get a scoop on for big technology or I should try as well. That's right. I'm pretty sure you'd beat me to the punch on that one. All right. I'm happy to put a wager on it. But they've never said Instagram's revenue. They've never broken it out.

I had to find out through sources that it was more than $20 billion in 2019. So that's a quarter of Facebook's revenue. So actually earlier I said profit. I meant revenue. The signs are there that Facebook is threatened by Instagram's size and influence. And we may not know through Facebook unless I hope Congress asks or the FTCS, how big are the how big is instagram how big is what's up like why is it okay for facebook to only produce a single family of apps number and then a facebook number

it just doesn't doesn't make sense for understanding their power and their influence and um and i think that the the other thing is you have seen Instagram become, from a product standpoint, a lot more like Facebook. They are adding notifications more often for people. They're adding recommendations. And just did a new product change today, which is going to be a couple of days afterwards, but we're in a new product, product era for Instagram already. But sorry, keep going to.

Yes, more focused on shopping. Yeah, which is bizarre. One of the things that I think has happened to Instagram is it has become more like Facebook. in the absence of the founders who really cared about simplicity. We have, if you use Instagram today, you have Instagram's main feed, but then you also have Instagram stories, IGTV, highlights,

you have shopping, you have reels, you have direct. You have all of these different. And checkout is kind of like shopping, but not. It's so confusing if you're a new user of this. platform to get into it and understand it. So I think that actually could be a threat. And there was an interesting line in the congressional report for evaluating the impact of

Facebook's ownership of Instagram on the cost to users. And one of the costs is not developing products in the interest of the user. Yeah, yeah, that's definitely. you look at where the harm is done. That could be it. Well, we'll see. It's kind of where both of our books collide, right? Like, yours is, you know, you talk at the end about Facebook's jealousy of Instagram.

For me, always day one. Like, you got to look at things like it's your first day and let go of the legacy and the message to Facebook on that front. It's like, we understand that there's some sentimental attachment to the blue app. But look at what you have in front of you. You know, you did buy this thing. Might as well write it. So, but we'll see. see if. Exactly. Yeah, maybe I, who knows, Mark Zuckerberg might have his own opinion on that. The FTC might have its own thoughts. And state AGs might have their, have other thoughts. So there's one thing that certain, I believe, is that this isn't going to be a static area. I feel like there's going to be a lot of action on this front. And hopefully this conversation. We've been talking about the election for four years. I feel like this is going to be the next big thing we talk about in tech. Totally. Yeah, I agree 100%. And Sarah, I hope you're prepared to do a lot of these type of conversations.

because you're going to be in demand. Thank you so much, Alex. It's been a pleasure. Well, great having you on, Sarah Fryer. Everybody should go out and pick up the book, No Filter, the inside story of Instagram. You're going to want to read it before the fun begins in Washington, D.C. Sarah, where can people get the book? Anywhere that you buy books, you can buy No Filter in many languages as well.

I would just make a special shout out to independent bookstores. it's been a tough time for them with COVID. So if you do have a favorite or a way to purchase, a lot of them are doing online shipping. Great. And then elsewhere online, people can get in touch with you on Twitter. Where else do you want people to find you? On Twitter, on Instagram, of course.

The book is also available as an audiobook, e-book. So so many different ways to interact with it and with me. Amazing. Well, Sarah, I'll be looking forward to reading your reporting. And again, I can vouch for the book. It's a good one. Thank you, everyone, for listening. If it's your first time listening, feel free to subscribe.

Actually, we invite you to subscribe. There's a new episode here on the Big Technology podcast every Wednesday. So if you like this one, we'll have another one coming up next week. And if you're a longtime listener and you're on, you know, one of the apps that allows ratings, for instance, Apple podcast, a rating would go a long way. So if you could rate us, it doesn't have to be five stars, but a rating would help. we'll take it and we'd be extremely grateful for it. I want to thank the people at Red Circle who do the hosting and sell the ads for the podcast

and Nate Gwattany, who's the terrific and talented editor who puts it together every week. We will see you back here next Wednesday for a new episode of the big technology podcast. It's going to be a fun one. We're going to talk a little bit about the way technology and the way Silicon Valley has had an impact, maybe a harmful impact, but certainly an impact on the rest of the economy. So until next week, this Alex Cantoritz, and I wish you well. We will see you then.