Why Zuck spent $20 billion on Instagram and WhatsApp
Meta's attempt to nix its upcoming antitrust trial has failed. Now its $20 billion acquisitions and behaviour will come under the spotlight...
“How times have changed. Not so long ago, a company called Facebook so dominated social networking that a movie charting its rise was called simply The Social Network.
“Fifteen years later, the company now called Meta argues that the market with which it was once nearly synonymous does not even exist.”
I couldn’t have written it better myself, but these are the opening lines of a US judge’s ruling on the US Federal Trade Commission’s (FTC) effort to break-up Meta.
Written in the judge’s own hand, the ruling is packed with zingers from the opening to the closing on page 92, and on a long flight I had time to read it all. It’s a beauty.
It’s unmissable if you use Facebook, Instagram, or WhatsApp, or if you rely on Meta for traffic, or revenue, or used to. This tells you what you need to know.
But before that, welcome to new subs from the US State Department, Amazon, Spotify, Disney, Google, Apple, Reuters, LADBible, AdRise, Reach, Narcity Media in Toronto and the Grasslands News Group in Saskatchewan, Canada, media relations agency Presshook in Brooklyn, New York, The Trade Desk in Singapore, Australian marketing agency Sling and Stone, and The Economic Times in Mumbai, among others.
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The FTC’s suit is a razor-sharp knife pointed at the heart of Meta that aims to carve Instagram and WhatsApp out of the family.
It seeks to create new competition in social, and if successful, it will almost certainly create new windows of opportunity for publishers crucified by Meta’s blanket news ban.
It also rips a Band Aid off some injustices that many of us have forgotten and connects some fascinating dots that make some sense of Zuck’s zigs and zags.
All this emerges from court papers after Meta asked a judge to dump the FTC’s case, claiming it can’t be a monopoly because there’s no actual market for social networking.
If you recognise this argument, it’s because it’s the same one Google tried - and failed - to use to escape its antitrust case.
Google claimed there was no such thing as a general search engine, because lots of rival sites had search, like Amazon, Yelp, TikTok, and others.
It was jazz hands of course. The court heard Google dominated general search with a 91 per cent share online and 95 per cent in mobile.
It took that judge just a few moments to throw that out, but it didn’t stop Meta trying the same Jedi mind trick on another judge.
This time it was Judge Jeb Boasberg (more on him later) and he couldn’t resist having a bit of fun in his ruling.
“Gazing across a landscape teeming with companies catering to every conceivable interest, Meta sees a bloody battle for users’ time and attention in which its products face withering competition,” he joked.
But it’s not that funny for Meta, which has $156 billion in annual ad revenue at stake.
The nub of the case is that Meta spent billions on Instagram and WhatsApp to become uncatchable and create an unassailable monopoly in social and ads.
Judge Jeb notes the clash between the FTC and Meta is a fight for the ages, creating “a voluminous evidentiary record, mere summaries of which span thousands of pages”.
I know. I’ve read many of them, and I promise I’ll make this easy.
The FTC alleges that Meta has had a monopoly over social since at least 2012, and it bought Instagram and WhatsApp to illegally maintain it.
Meta was losing its dominance, and failing at mobile, the FTC claims, so it spent $20 billion buying the fastest-growing rivals to create an impassable moat.
Meta’s defence runs to dozens of pages, but in essence it argues that there are lots of other sites that could be argued to be social, so social networking doesn’t exist.
And that buying Insta and WhatsApp was not illegal as it has spent a motza making them what they are now.
Meta wanted the case thrown out, and that decision was passed to my new favourite judge, Judge Jeb, who sounds like an entirely awesome dude.
He’s from San Francisco, then went to Oxford. He’s worked on solving world poverty, spent time as a history teacher, and coached women’s basketball, before going to Yale.
He then spent five and a half years jailing murderers before President George W Bush recognised his talents and kicked him upstairs. President Barack Obama then did it again, making him chief judge last year.
Judge Jeb also has a top-secret gig on the US Foreign Intelligence Surveillance Court, the shadowy operation that oversees surveillance of foreign spies. Spying on spies. Cool.
He’s also the judge who ruled you couldn’t see photos of a dead Osama bin Laden after the Seal Team Six raid.
He’s the one who ordered the release of 14,000 of Hillary Clinton’s emails after an FBI investigation.
And turned down a Freedom of Information request to release President Donald Trump’s personal tax returns.
Having read up on him, this is my conclusion: You probably don’t f*** too much with Judge Jeb.
And this is what he had to say about Meta’s attempt to throw out the case…
“While the parties’ legal jousting is both impressive and comprehensive, it leaves no clear victor. This case must go to trial.”
That means it’s game on. The Meta antitrust trial is going ahead folks.
Here’s what you need to know.
The court papers say:
“Mark Zuckerberg founded Facebook in 2004 initially limited to college students.
“While Facebook may have been early, it was not the first. Others include the Friendster and MySpace.
“By 2009, Facebook had become the most widely used social network in the US.”
Meta famously moved fast and broke things:
2007: It launched Pages to follow business, organisations, and public figures.
2010: Groups, allowing users to form subcommunities.
2011: Messenger, for chat, group chats, voice and video calls.
2015: Live, the mobile video livestreaming service.
2016: Marketplace, to trade items in the community.
2017: Stories, to share short-form content with friends and followers.
2019: Gaming, to play, watch, and connect with Groups
2019: Dating, for romantic connections, and
2021: Reels, for short form videos.
The papers continue:
“Facebook managed fantastic growth. By the end of 2009, it boasted 112 million active users in the US and Canada. That expanded to 158.9 million by early 2012.
“It charged users nothing to use the service. That remains true today across all four applications that constitute the family of Meta’s products: Facebook, Messenger, Instagram, and WhatsApp.
“Instead, Meta generates revenue through advertising on Instagram and Facebook.
“Through its Ads Manager, Meta lets advertisers customise campaigns to target users, with options to increase or decrease spending based on how ads are performing.
“In 2021 alone, Meta earned $114.9 billion in advertising revenue.”
Meta’s kept rising. Its last earnings in October hit $40.59 billion, up 19 per cent on last year. That’s a mind-blowing $441.2 million a day, or $306,300 every minute.
The growth was driven by increasing ad loads (up seven per cent) and rising ad prices (up 11 per cent) driven by Meta AI and AI-ad products.
Meta has also ballooned to 3.29 billion active users and is still rising - up another five per cent this past quarter. And it’s growing much faster than all its tech peers.
Zuck has made Meta into a Magic Money Making Machine and he’s the undisputed King of His Castle. The court papers say:
“Since founding, Zuckerberg has remained at the helm” unlike his peers at Google, Amazon, Microsoft, and Apple.
“He controls a majority of the company’s voting shares. He has testified that he cannot “think of any examples” when the board ever overruled a decision he made.”
That’s unprecedented. At the peak of his power, Alexander The Great ruled 15 per cent of the world. Today, Zuck monetises more than 50 per cent of humanity.
But the court papers point out:
“Facebook did not merely invent new features and collect new users. It also grew by acquisition.
“It changed its name to Meta in 2021 to unite its various apps and technologies under one brand. Two are at the centre of this lawsuit.”
The first is Instagram, and jeez, Zuck was jealous.
In 2012, Zuck wrote to his team: “When you look at Instagram and then go back to our Newsfeed, it looks like ours was built in The Stone Age.”
Meta was trying and failing at mobile, and Instagram was taking it to the woodshed. Kevin Systrom and Mike Krieger had created Insta two years before as a photo-editing and sharing app.
The court papers say Instagram had just a dozen employees and 35 million users, but it was adding 25,000 a day.
Systrom knew he was on a collision course. He testified it was “inevitable” Zuck would “think that we were in conflict” and would want to buy it.
Zuck was on the warpath. He wrote Instagram was “kicking ass” and could threaten Meta by pivoting to become a social network rival.
He threw money at a homegrown competitor initially called Snap and ordered lieutenants to “crank and get it out” or Instagram “may really be unreachable”.
Inside Meta HQ, a rumour mill was spinning up. There was gossip that Apple might buy Instagram, or even China’s WeChat which was also on a tear.
By February 2012, Zuck asked colleagues whether Meta “might want to consider paying a lot of money” for it. His number was $500 million because falling further behind was “really scary”.
Then he made an uncharacteristic mistake, writing to colleagues that his reason for acquiring Instagram was to kill a competitor.
He wrote:
Soon after, Zuck softened the rhetoric, but the original mail was already in the record.
Either way, Zuck was intent on buying Instagram, saying it was probably worth “~$1 billion because it was pretty threatening and could hurt Meta meaningfully”.
And that’s what Meta paid. $1 billion. It was double Instagram’s then valuation and what Instagram’s now-wealthy founders called an “unprecedented” amount.
A week later, Meta submitted a notification to the FTC, and after a four-month review, it was cleared - and the countdown to antitrust began.
The second was WhatsApp, and he was going to break the bank.
Even with Instagram in the bag, Meta was still losing on mobile. Zuck could see that was where the future was being fought, and he needed to close the gap.
Facebook Messenger had grown well in the US, but WhatsApp was growing much faster, especially overseas.
Again, Zuck feared a rampant WhatsApp could pivot to become a social network rival, just as WeChat had done in China, growing to 1.4 billion users.
Internal Meta documents reveal execs branding WhatsApp a “significant competitive threat”, and another saying it kept him “awake every night”.
Meta also sweated that Apple or Google, could swoop to buy WhatsApp - particularly after Google’s own attempt at social, Google+, had been a hopeless flop.
Those fears were well founded. Google had been secretly trying to buy WhatsApp for two years but was being knocked back. WeChat had also kicked the tyres.
Zuck had had enough and went to his board. He wanted to use mergers and acquisitions (M&A) “to build a competitive moat around Meta on mobile and ads”.
He would double down on Instagram and buy Meta’s way to dominance again.
Interesting, at just this point, Sequoia Capital, one of Silicon Valley’s leading venture capitalists, invested $8 million in WhatsApp, and partner Jim Goetz took a seat on its board.
How much do you know about WhatsApp before it was consumed into Meta?
It’s one of those famed Silicon Valley rocket ships. It was launched in September 2009 by Brian Acton and Jan Koum as a simple messaging app and caught a wave.
Android users paid 99c-a-year and iPhone users $1, and it exploded. Court papers record:
“By March 2011, it had 17 million users and was registering 100,000 new users each day.
“By April 2013, numbers had grown to 320 million users, and 800,000 new registrations per day.”
Only 6.9 million, or nine per cent, were US based giving loads of room to grow, and the signals from its global penetration suggested it would be stratospheric.
“99 per cent in Spain, 94 per cent in Mexico, 90 per cent in Brazil, 65 per cent in India, and 49 per cent in the UK.”
In early February 2014, Zuck was super serious about buying it. He sent a delegation to kick it off. Within a fortnight, Meta’s board agreed on a $19 billion price-tag.
The FTC’s antitrust case is that Meta massively overpaid and used its financial muscle to beat off rivals. Some estimates pegged WhatsApp’s worth at $12.5 billion.
The FTC alleges Meta didn’t even do a valuation and spent $19 billion on a captain’s call from Zuck. It says KPMG was only sent to sense check it three years later.
That snippet of evidence really gets up Meta’s nose, presumably because it goes to Zuck’s control and rattling shareholders.
In its rebuttal, Meta’s lawyers say the FTC’s claim is so far-fetched it makes “Jack and the Beanstalk sound like a documentary”.
Man, this is going to be colourful when it gets to court. 😂
Meta’s monster acquisition went public on February 19, 2014. The business cost $16 billion, and the other $3 billion was given to WhatsApp employees.
“Meta submitted to the FTC and DOJ a notification, and just under a month later, the FTC closed its investigation, permitting the merger.”
Fast forward to now and the FTC wants to look at those cases again and have a rematch.
To unwind the deals, the FTC must prove Meta is a monopoly, and to do that, it must prove that social networking is a market.
Put plainly, you can’t be a monopoly of a market that doesn’t exist. Meta argues there is no such thing as a personal social network (PSN).
Meta claims YouTube and TikTok are all tanks on its lawn, but the FTC argues they’re different, because Meta focuses on relationships between friends and family.
Zuck did himself no favours during FTC hearings, telling them: “The use cases (Meta has) focused on most are helping you connect with your friends and family”.
He went on to say that despite the “explosion” of public content on Facebook in recent years, Meta would still put friends and family at the core of the experience.
Adam Mosseri, now head of Instagram at Meta, agreed: “Connecting with friends and family is a core use case and Instagram is uniquely good at it”.
Judge Jeb quickly ruled in favour of the FTC, confirming a social media market exists, Meta has the dominant share of it, and it’s near impossible for a rival to compete.
But that battle is far from winning the war. To win when the case comes to trial, the FTC has to prove Meta has monopoly power in its market…
And that Meta engaged in “wilful maintenance of that power, as distinguished from growth as a consequence of superior product, business acumen, or historic accident”.
That requires the FTC to prove Meta bought its way to dominance and then used its scale to crush competition.
Forgive me nerding out there, but antitrusting a digital media company is hard because the normal rules don’t apply.
Meta looks kinda free to the average user. How can you be a monopoly if your product is free to consumers?
One way to test that, that is being pioneered in this case, and the Google one before it, is to show the company has the power to hike prices and degrade products.
Meta just reported in its latest financials it increased ad load (degrading the product) and raised prices by 11 per cent. I warned this was coming at the start of this year.
The FTC argues that Meta isn’t really free. Consumers pay by watching ads. Increasing ad load is a “tax on users” that leads to less privacy. Everything has a price.
What was interesting was that the FTA claims its probe shows “Meta raises ad load for users whose demand is more inelastic”.
Basically, it dumps tons more ads on people who’re addicted.
Meta counters users are free to toddle off to TikTok or do something else if they choose.
Judge Jeb laughed that off. “So’s watching a movie at a friends’ house, reading a book at the library, and playing online poker,” he said, and Meta lost the argument.
That means this is going to trial people. The whole charabanc that was set in motion by President Donald Trump during his first term is going to court.
Meta will face the same glare of legal scrutiny as Google, which collapsed in a sweaty heap like a Pommie tourist on Bondi Beach.
Won’t it be fun when more of Zuck’s internal emails are revealed…
When the other bombshell case brought by 41 US States and Washington alleges Meta actively harmed children, especially teen girls, by intentionally addicting them.
When we hear the details behind a 233-page indictment that says:
Meta engaged in a “scheme to exploit young users for profit”.
Misled the world about safety features and harmful content.
Harvested children’s data.
Violated US federal laws on children’s privacy, and
Knowingly deployed changes to keep children on the site to the detriment of their well-being, violating consumer protection laws.
When we learn more about the Wall Street Journal’s revelations that Meta served sex ads to adults following kids on Instagram and stealing children’s data was “routine and an open secret”.
I could go on, but for me, the odds on a Big Tech boss heading to jail sometime soon just shortened again.
To be fair, it’s not only Zuck and Meta that have a lot riding on this case. It’s been brought by the Federal Trade Commission, under its leader Lina Khan.
She’s a polarising character in US politics. Some love her fighting for everyday folk, most notably Vice President JD Vance who comes from the wrong side of the tracks.
The successful antitrust case against Google was brought by the Department of Justice, not the FTC, but the two work closely together.
They have carved up the Big Tech takedowns between them. If Khan keeps her job, this will be her moment.
Her main target remains Amazon, but she’ll need to keep her job and win this one to get that chance. These are big stakes.
Over the past year, I’ve read 1.5 million words of legal papers, from the Google antitrust trials, the rulings, and the upcoming trials against Apple and Amazon.
I’m really liking Judge Jeb though. He joked in the papers: “Unfortunately for the reader, who’s already traversed hill and dale, more tricky terrain must be navigated before we’re home.”
It’s going to be a hard-fought trial. Nothing less than the future of Meta is at stake. The outcome will decide how 3.2 billion people share their lives.
And with Meta reluctantly being the world’s largest source of news content, it will have massive implications for the news industry too.
Zuckerberg has proven over 20 years to be a visionary; resilient, strategic, and aggressive builder of the future. He is truly the honey badger of digital.
Few who have bet against him have survived, and despite headwinds, accusations, and the spectre of antitrust, he’s grown Meta faster than any of his Big Tech peers.
His eyes are set on an AGI future. This antitrust case will be fought in his rearview mirror, but if it goes badly, it could send his juggernaut careening off the road.
I’ll let you know as soon as the trial date has been set.
In the meantime: Here’s a journey into Zuck’s brain so you can see it from his perspective.
…until next time 👋