The Daily - Should Facebook Be Broken Up?

Episode Date: December 17, 2020

This episode contains strong language.When the photo-sharing app Instagram started to grow in popularity in the 2010s, the chief executive of Facebook, Mark Zuckerberg, had two options: build something comparable or buy it out. He opted for the latter.The subsequent $1 billion deal is central to a case being brought against Facebook by the federal government and 48 attorneys general. They want to see the social network broken up.Will they succeed? On today’s episode, we look at one of the biggest cases to hit Silicon Valley in decades.Guest: Mike Isaac, a technology correspondent for The New York Times. For an exclusive look at how the biggest stories on our show come together, subscribe to our newsletter. You can read the latest edition here.Background reading: Regulators have accused Facebook of buying up rising rivals to cement its dominance over social media.The cases against Facebook are far from a slam dunk — the standards of proof are formidable.For more information on today’s episode, visit nytimes.com/thedaily

From The New York Times, I'm Michael Barbaro. This is The Daily. The federal government and 48 attorneys general are seeking to break up Facebook, saying that it's become an unlawful monopoly that is hurting consumers. Today, my colleague, Mike Isaac, takes us inside one of the deals

at the center of that claim. It's Thursday, December 17th. Mike, where does the story of Facebook and Instagram begin? I think you have to go back to 2010, which, you know, for us now seems like a bygone era of the internet, basically. But if you can remember, this was back when we were all using Facebook, you know, on our desktop computers. It was more a relic of I sit down and look in my desktop,

maybe not even a laptop, and I post photos or status updates to my Facebook there. So very different era, very different Facebook. For 2010, we're gonna take the biggest leap since the original iPhone. Along that time, this is when really the rise of the smartphone started becoming a thing for people. We're introducing iPhone 4. This is really hot.

It was just sort of a real inflection moment on how people use their computers, and rather than sitting down in front of a desk, it was in our pockets, basically. So around this time, two Stanford undergrads, Mike Krieger and Kevin Systrom, decided to start a company together. At the time, it was called Bourbon, after Kevin's love of brown alcoholic liquids, I think. And it was basically a social check-in app. You say, hi, this is where I am. I'm at the store or whatever.

And then almost immediately, it doesn't catch on. Competitors like Foursquare seem to be doing much better. So they're trying to figure out what to do, what the next steps are. And they essentially notice everyone really likes the ability to post photos, to attach a photo to their check-ins. And, you know, suddenly, you know, Kevin gets this bright idea. It's like, what if we, instead of focusing on the check-in, we focus on letting people post photos from their phones? They do a hard pivot and bourbon becomes what we now know as Instagram. I'm not sure how many of you have heard of Instagram, but I love it.

Instagram allows users to take photos with a vintage look and instantly share them. The real thing that resonated with folks is the filter. It makes your photos better. These filters make your photos better. With a free app that allows you to take any picture and make it a memory. So it looks like an old black and white or even a Polaroid. Any dude on the street can take a photo

and suddenly become Ansel Adams after you sort of tweak the visuals a little bit. Right, the black and white filter, man. Everybody was capable of epic photography. That's right. It was blowing up in 2011. At the time, I remember going to, you know, Silicon Valley little startup parties and mixers.

And it was the thing everyone was showing to each other on their phones. This was kind of how app discovery happened when it was just like, oh, what are you using? Oh, this is what I got. And it was always Instagram. Everyone with an iPhone had Instagram, basically. So, Mike, as this is happening, what does Facebook, at this point the biggest social networking company in the United States. What does it make of Instagram? Because as you said, posting photos, sharing photos, that's happening on Facebook, but probably not at the same level as it's happening on Instagram.

Yeah, so down in Silicon Valley, Mark Zuckerberg, Facebook's founder and CEO, is just watching Instagram blow up. I think he's always kept an eye on competition, but he's had a real eye for what the next big thing is and how people share things. And I think almost immediately he saw how quickly, how popular posting photos to Instagram was and sort of intuitively knew this is the direction that people are going. Everyone has a smartphone. Everyone's taking photos all the time. Everyone needs a place to put them. I want it to be Facebook. And so Zuckerberg and Facebook basically have to decide,

do we build something comparable to Instagram or do we just buy them outright? And I actually have some emails right here that Zuckerberg was sending to his lieutenants at the time when they're grappling with this internally. And let me read a few. In one email discussing Instagram, Zuckerberg said, quote, the businesses are nascent, but if they grow to a large scale, they could be very disruptive to us. And in another email, he said, quote, Instagram can hurt us meaningfully without becoming a huge business. And so Mark Zuckerberg decides to pull the trigger. Well, this just in, a big announcement from Facebook. While one picture might be worth a thousand words, it seems that a whole network of pictures is worth about one billion dollars.

Facebook buys Instagram for $1 billion. A company with only 13 employees bought today by Facebook for $1 billion. A billion dollars of money? For a thing that kind of ruins your pictures? His company doesn't even make money. But as of today, it's worth more than the New York Times. So rather than building its

own version of Instagram that would compete with Instagram, Facebook just buys it out. Yep, exactly. To a lot of people, I think that was really crazy at the time because no one had ever paid that much money to acquire what was essentially a smartphone app. And everyone just suddenly became newly minted paper millionaires overnight, including Kevin and Mikey, the two founders. And what about regulators, Mike? Do they raise any questions about this deal? Not really, not at the time. The Federal Trade Commission, which is the government agency that reviews these kind of mergers and acquisitions, started their usual review process looking into the deal. Whether they believed it was immediately anti-competitive, whether it was Facebook just sort of pouncing to kill off a competitor that consolidates the market.

But I think it was a different time. it was a different time. I think at this point, there were really questions swirling around whether Facebook would still exist in a couple of years, you know, or whether it would go the way of Friendster or MySpace or once popular social networks like those that people can barely remember them if they weren't, you know, using them at the time. So I just don't think immediate alarm bells were going off for people. Okay. so what happens next after the deal is done? How does it all go? So by 2014, Instagram is less an innovation of Silicon Valley and more just sort of a product of pop culture.

By then it became like a verb. I'm going to Instagram my latte, or I'm going to Instagram that or whatever. Wait, excuse me. I think the phrase is gram it, but okay. I'm going to Instagram my latte or I'm going to Instagram that or whatever. Wait, excuse me. I think the phrase is gram it. But okay. I'm showing my age.

It starts showing up in hip hop lyrics. You know, artists and pop culture celebrities, judging by her Instagram, Kim Kardashian is obsessed with her five-year-old nephew. First off, Taylor Swift posting this photo of her and her cousins on Instagram. Are starting to get on Instagram and show their lives more. It's really, it becomes a force. And I think photo sharing and this sort of intimacy that you can capture with Instagram

is almost immediately clear to everyone that this is the next wave of social networking. Yeah, I'm going to be honest and say, I'll never forget the moment I realized that if I followed Oprah Winfrey, I was going to have access to the interior of her private plane where she and her dog sleep in a cabin with a bed.

Oh my God, I need to follow her. I didn't know that. Anyway. So it was around this time that Mark Zuckerberg's antenna popped up again, because he noticed another app creeping up in the App Store very quickly. 350 million images are sent on Snapchat every single day, Tony. Wow. Wow. Wow. Okay. And that app was Snapchat. The killer feature in Snapchat was the idea that you could take photos and they would go away after 24 hours. This product that people really liked called Stories and Zuckerberg immediately saw how people were responding to it. So just like Instagram,

he decided Facebook had to do something about this. So he ends up making an overture and offering $3 billion to buy Snapchat. But unlike Instagram, Snapchat's founders rebuff him, basically, and say, no, I think we're going to do our own thing and build our own network. So Zuckerberg decides, okay, well,

if you're not going to join me, then you're against me. And starts internally discussing how they're going to deal with the Snapchat problem. And that eventually leads to settling on Instagram as their secret weapon to go up against Snapchat. Instagram has a new feature called Stories. And yes, it looks a lot like Snapchat. That sounds so familiar. I wonder where that came from. It's certainly a new feature called Stories, and yes, it looks a lot like Snapchat. That sounds so familiar. I wonder where that came from. It's certainly a Snapchat feature. So Kevin, Mikey, and Zuckerberg create what essentially is a clone of Snapchat Stories,

and it's called, naturally, Instagram Stories. So, not hiding what's going on here. So not hiding what's going on here. Stories, that was basically a blatant copying of Snapchat stories. And it works. Everyone that was posting stories to Snapchat suddenly finds that they can do it in Instagram. And, you know, it almost immediately kneecaps Snapchat's growth. And I don't think Snapchat ever fully recovered from that moment.

So Mike, at this point, just to summarize the ground we've covered, Facebook sees a threat at Instagram and buys it, neutralizes that threat. Sees a threat in Snapchat but can't buy it, so uses Instagram to, as you said, kneecap Snapchat. So by this point, Zuckerberg seems to have gotten very good at either buying or disabling his competitors. That's right. But by the end of 2018, something shocking happens that I don't think anyone really saw coming. The Instagram founders decide that they're going to leave Facebook. And why did they decide to leave? So, you know, Zuckerberg initially promised them this full autonomy. But by 2018, he starts to make these little tweaks and changes that essentially try to push Instagram and Facebook together a little bit more and meld them together and make them

into something that the Instagram founders didn't want. You know, they wanted their autonomy. They wanted to sort of build this product without Facebook's hooks inside of it or connective tissue there. They said, that's not what we signed up for. We don't like the direction this is going. Here's our resignation. See you later.

So I think their resignations come, you know, at a time where folks are starting to question a lot of fundamental things about Facebook. St. Petersburg's notorious troll factory is finally giving up its secrets. You know, whether the company's good for democracy at large. Reports in The New York Times and Britain's Observer suggest Facebook data was misused to sway voters in the 2016 election. You know, they don't care about your privacy, your right to not share everything. Cambridge Analytica misused the data of 50 million Americans collected from Facebook. Mark Zuckerberg found himself at the heart of America's democracy, delivering an apology. That was a big mistake.

And it was my mistake. And I'm sorry. The bloom was off the rose officially. Yeah, totally, totally. We'll be right back. So Mike, tell me about this major lawsuit that was filed last week and how it is that Instagram fits into it. attorney generals across almost all 50 US states basically come out swinging against Facebook. And these pair of really large, really sort of far-reaching lawsuits against the company would say that over the past 10 years, basically, Facebook has attempted to create a monopoly

on social media for consumers in the United States. And specifically in the company's history of acquisitions and Mark Zuckerberg's pursuing companies like Instagram, companies like WhatsApp, making these billion-dollar acquisitions, he did it with the intent to kill off any sort of competition he might have in the marketplace and to essentially become the one true social network. The even further reaching argument is that the FTC and the AGs want to essentially cut up Facebook into a bunch of different parts. We'll spin off Instagram, spin off WhatsApp, spin off some of the most important parts of Facebook's business and future growth in the long term. And what they said is that that will essentially help consumers have more choice in social media in the marketplace and protect them

from Facebook sort of controlling all the social media landscape, controlling what privacy choices are, controlling how much data you share, controlling one company from having a view over everything we do on social media. I think it's worth pausing and just observing what an enormous deal this lawsuit is. I mean, it is a very rare thing in the United States, in this free market economy, for our government to file a legal action that attempts to break up a major company that's in all of our lives. I mean, the last time this happened, I was a kid, you were a kid. It was when the United States government did this to Microsoft. And that was historic. It was the biggest business story of its time. And it hasn't really happened since.

Yeah, I think this is really, you know, one of the biggest cases, probably the biggest case to happen in Silicon Valley in ages. You know, it's been 20 years since the landmark Microsoft case. And we haven't seen anything since as far reaching and as aggressive by the government since this Facebook lawsuit. And how central is the Instagram deal that we spent so much time just talking about to the government's case? It feels pretty central. I think it's really key. I mean, we can look back over the evidence that they've presented in their lawsuit so far, and a lot of the most questionable quotes from Zuckerberg revolve around his decision to buy Instagram in particular early on. His questions around, do we need to worry about them?

Is this something we have to do? Are they going to be a viable threat at some point? You know, versions of those types of questions that he's batting around internally. So what was once the ideal of a tech acquisition is now becoming this sort of Achilles heel for Facebook. And the types of questions that were being asked internally are now being presented as evidence of kind of anti-competitive monopolistic behavior of a company trying to basically snuff out its competitors. That's right. I think, you know, they're looking back on 15 years of emails, basically, and trying to sort of say Facebook, in its ascent to being a network used by 3 billion people, most of the United States has along the way crushed any idea of competition in the U.S. And that's not legal.

And what does Facebook say in response to this? I'm guessing they see this all very differently, especially when it comes to an acquisition like Instagram. Oh, man, yes. They're not taking it lying down. I mean, to be clear comes to an acquisition like Instagram. Oh man, yes. They're not taking it lying down. I mean, to be clear, this is existential for Facebook, right? The government wants to break off one of the most high-growth apps that Facebook owns, Instagram, this thing that young people like. They still see skyrocketing usage all over the world.

This is really key. So they've laid out, you know, some pretty compelling points in return to the government's argument. Basically, for one, the FTC did not challenge the acquisition eight years ago when it happened. And so they're basically saying you essentially want a do-over. I think another thing too was Instagram wasn't huge at the time that Facebook bought them. And that, you know, potentially, if Facebook had not bought Instagram, it wouldn't necessarily be the behemoth it was today. You know, we have no real way of knowing that either way. That's just an alternate version of history.

But that's what Facebook's argument is. We helped it become as big as it is. Third, you know, it's free. People don't have to pay for any of Facebook services. So it's not like, you know, Facebook bought Instagram and suddenly jacked up the price and now consumers are getting harmed. And so, you know, if you feel like you don't want to use it anymore, then just go take your stuff elsewhere, basically, is what they say. And then, you know, finally, there have been other competitors that have popped up in the interim, right? You know, TikTok has grown

immensely in just the past two or three years. You know, Parler, even this new social media company for conservatives, that has been growing, growing a lot in the past few months. I think Facebook even sees iMessage on iPhones as a threat. So really the definition of how many social networks are out there that compete with Facebook, they feel like is much bigger than the FTC and the AGs are recognizing. So given those arguments, how strong is the legal case being brought against Facebook? I'm sure you talked to lots of people about it. Is it considered a strong case?

Is it considered a weak case? Even this has contention among legal scholars. There are folks like Tim Wu, who's a professor who's followed this antitrust stuff for a long time, who believes all they have to do, all the government has to do, is prove that Facebook has a history of trying to snuff out the competition systematically over time. And you can point to the emails in Facebook's own history and just sort of make the case that way. I think there are other folks who think that the government has a tough case. I think that you have to sort of the way antitrust law is written, prove that you're doing harm to consumers. And, you know, there are probably not as many clear cut cases of this harms me directly because people can kind of come and go as they please.

What the government will say is, you know, one company owning everything can erode users' choices around privacy over time. And so if you want to talk about consumer harm, if we're stuck in Facebook, Instagram, and other apps that are owned by Facebook, we don't have a choice on how much data and information we're sharing about ourselves. And that's the direct part of consumer harm. So I don't think it's an open and shut case for either side. I think it's going to be complicated. And I also think it's going to take years to figure out. Like, it feels like the case being made against Facebook, at the end of the day, it raises really interesting questions about what exactly it means to be anti-competitive, especially in the kind of new world of social media and the digital

economy. Because we have been living in a world of corporate acquisitions for a really long time. Businesses buy other businesses. Airlines buy airlines. Newspapers buy newspapers. And startups buy startups. And for the most part, regulators don't get all that involved in stopping these acquisitions. The default mode is, congratulations, do your merger.

So I wonder why we think the government is so focused on Facebook and on these deals, why it has become the target of this antitrust attention. And is that because of the unusual scale of Facebook, the kind of singular role that Facebook plays in our digital lives? Is it the fact that Facebook has become the focus of so much controversy, frankly, over the past few years? Is it the fact that Facebook has become the focus of so much controversy, frankly, over the past few years? Is it all the above? I mean, what do you make of that? I think probably in legal circles and definitely in Washington, there's this perception that, you know, the FTC essentially has been asleep at the wheel for a long time in the early aughts and 2010s, right? You know, again, like this default mode was sort of anoint each acquisition, let them sail

through and not really put up much of a fight. I also think that people looked at tech differently back then and really didn't see the potential harms that some of these networks can do and have on the world. Misinformation and using social networks to manipulate democracy, that was not in my mind when I was taking photos of a latte back in 2010. That was just, that's a different time, right? And so I think, you know, some folks would say it may be years later, but new information has come to light. We can understand how these networks work and how they can be harmful to consumers and how having so much power in one particular company

can be a bad thing over time. And so now there's political bipartisan support around pursuing companies like Facebook. Mike, let's imagine for just a moment, in a theoretical world, that the government, the attorneys general, the FTC succeeds in its lawsuit, and the courts decide that Facebook

should be broken up. How exactly does that work? Because as you said, these businesses, Facebook, Instagram, they've all gotten very interwoven. It's a great question. Right now, the executives at Facebook are in the process of integrating the back ends of a few of the apps, Instagram, Facebook Messenger, WhatsApp, and basically knitting them all together so that people can message each other across the apps, which is very different than the history of how these apps have been sort of used. It's been a years long project of the past two years. And the question is, by the time this lawsuit gets figured out, if it does order a breakup, can you even technically do that at some point? Can you disentangle them? Right. And Facebook

has not said it's going to stop its work on the apps. It's not going to like stop knitting them together. So I haven't found a good answer from that. Definitely not from Facebook, not from technologists quite yet, because it's still in process. I still think that if you can put something together, you can probably un-put it together and Facebook would have to probably find a way to cleave it up. But if Facebook doesn't own Instagram, does that fix the fact that there are foreign trolls doing damage across the network? No. Does it change the problem of misinformation, whether it's going to exist or not? No, it doesn't. There's one thing we learned, you know, there's always new problems we're finding out as a result of the internet, and it'll take much longer and, you know, far more different approaches and potential laws

and regulations to figure that out rather than, you know, one big action that cleans up everything. Well, Mike, thank you very much. We appreciate it. Thank you. Thanks for having me. We'll be right back. Here's what else you need to know today.

This goliath of a company is using its power to manipulate the market, destroy competition, and harm you, the consumer. In the latest antitrust case brought against a big tech company, 10 attorneys general accused Google of illegally abusing its power over online advertising. Let me put it this way. If the free market were a baseball game, Google positioned itself as the pitcher, the batter, and the umpire. The lawsuit said that Google now controls software at every step of the ad sales process and has used that power to overcharge clients, a claim that Google denies. And on Wednesday night, congressional leaders said that they were closing in on a roughly $900 billion economic relief package that would include a second round of direct payments to Americans, additional unemployment benefits, and funding for vaccine distribution. But the plan omits coronavirus liability protections for companies, which were

sought by Republicans, and a dedicated stream of funding for local governments, which was sought by Democrats. A deal could be completed by this morning. Today's episode was produced by Rochelle Banja, Nina Patuk, Rachel Quester, and Daniel Guimet, with help from Alexandra Lee Young. It was edited by Lisa Chow and engineered by Chris Wood. That's it for The Daily. I'm Michael Barbaro. See you tomorrow.