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Killer acquisition or successful integration: The case of the Facebook/Instagram merger
With continuing scrutiny of all things Big Tech, the Guardian reported that Facebook is rolling out functionality that allows users of Facebook Messenger and Instagram's direct messaging service to message each other across apps. Meanwhile, the FTC's investigation into the Facebook/Instagram merger has continued, and there is building anticipation in the press that enforcers could bring a lawsuit, or Congress will push for changes in merger review going forward to prevent a similar merger from being approved again. But far from being an example of a "killer acquisition" that has harmed consumers by reducing competition, the merger has improved the user experience on Facebook and Instagram.
Critics have argued that Facebook saw Instagram as a form of nascent competition, and bought it to maintain its dominance in social networking. They have seized on a series of emails from Mark Zuckerberg that appear to suggest that this is how he saw the acquisition. Some argue that the fact that the FTC did not take action against the merger at the time proves that the laws that govern mergers are broken.
Potential competition is an important consideration in merger analysis - the possibility that a firm will go on to compete with the one it is merging with, even if it doesn't today. But it doesn't follow that all acquisitions by major companies harm competition, just because we can imagine a scenario where the two parties go on to compete with each other. Competition and consumer welfare could be increased if the merged entity is able to provide a better product or service to its users, or by incentivising future startups by giving entrepreneurs and their investors a viable "exit strategy". Venture capitalists often fund projects that do not make short-term profits in the hope that large companies will buy them out.
For instance, the innovators that came up with Instagram were compensated when Facebook acquired the company. Some questioned why Facebook was willing to pay $1 billion to acquire Instagram when it didn't make any money up to that point and had a much smaller user base than Facebook. But the advertising expertise Facebook provided allowed them to make Instagram into a much more profitable venture. And, in turn, Instagram has helped Facebook's platform become much more profitable as well through better photo-sharing capabilities and growing both of their user bases.
Describing the Facebook/Instagram merger as a killer acquisition proves too much. If Instagram was an important source of potential competition to Facebook in 2012, why don't social networks like Snapchat, Twitter, TikTok, YouTube, Pinterest, and LinkedIn also count as that now? If they do, then Facebook continues to face considerable potential competitive constraints.
Now, some may argue that the costs of blocking mergers like Facebook and Instagram are low because the benefits to consumers or competition are unlikely. But this is inconsistent with what happened when Facebook integrated Instagram into its network.
After Facebook acquired Instagram in 2012, they began to integrate the two by making it easier to share photos between them. A "like" or comment on Instagram could then appear on the Facebook user's news feed. The integration also offered Instagram users the ability to find and connect with Facebook friends. Scholarship suggests this integration greatly increased Instagram's user base and demand for third-party photo applications on Facebook's platform. Zhuoxin Li and Ashish Agarwal found in their analysis that "consumers obtain additional value from Instagram after its integration with Facebook, leading to a large increase in the use of Instagram for Facebook photo sharing." Blocking the merger would have prevented this additional value to consumers.
It is a cost when authorities block a merger that would benefit consumers. The risk of wrongly blocking a pro-consumer merger is not zero. While competition often overcomes even large and powerful incumbents over time, blocking beneficial mergers just leave consumers without the benefits they would have provided. This is why antitrust law currently avoids blocking mergers when there are potential benefits.
Obviously, Facebook has not killed Instagram - unlike in the true "killer acquisitions" that some economists have identified, where acquisitions are made to shut down the production of a rival to a patented drug. Instead, Facebook has helped to build Instagram into the product it is today, a position that was far from guaranteed, and that most of the commentators who mocked the merger did not even imagine was possible. Instagram's integration into the Facebook platform in fact did benefit users, as evidenced by the rise of Instagram and other third-party photo apps on Facebook's platform. The Obama-era FTC was right not to prevent this merger. This is not the time to reverse course.
Ben Sperry is Associate Director of Legal Research at the International Center for Law & Economics, where he focuses on the intersection of civil liberties and government regulation.