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Friday, August 24, 2012
by Michael Loatman
In April, Facebook announced it would acquire Instagram–the creator of a popular photo-sharing application–for a mix of cash and company stock then worth $1 billion.
The extremely high price tag for Instagram was notable because it employed only about 13 employees and did not have any revenue. Did Facebook offer a king's ransom to prevent a potential rival competitor from emerging?
The Federal Trade Commission and the Office of Fair Trading (OFT)–the United Kingdom's antitrust regulator–recently scrutinized the deal. The OFT decided not to challenge the deal on Aug. 14, and the FTC soon followed Aug. 22.
The FTC did not provide a public explanation for its decision, but the OFT released Aug. 22 its decision that explained it did not believe the deal would lessen competition in photo-sharing apps or online brand advertising.
The OFT's decision said that Facebook launched a photo-sharing app similar to Instagram in May. Instagram, it concluded, faced much more competition from rival third-party photo apps such as "Camera Awesome, Camera +, Flickr, Hipstamatic, Path, and Pixable" than Facebook's camera app.
The OFT's decision then addressed whether Facebook sought to acquire Instagram to remove a potential rival social network. "It is likely that pre-merger Facebook was aware of Instagram's growing user base: Instagram was Apple's App of the Year in 2011 and had several high profile users (such as Barack Obama)," the OFT said.
It added that the number of Instagram users had grown from 1.4 million in January 2011 to 24 million in February 2012. Third parties explained to the OFT that it would not have been difficult for Instagram to add social media features to make it similar to Facebook.
Nonetheless, the OFT concluded the evidence it reviewed showed Instagram was not "particularly well placed to compete against Facebook in the short run." It also said Google, Yahoo, and Microsoft currently provide strong competition to Facebook for online brand advertising because the companies have sites that gather user demographic and behavioral data.
The OFT also addressed whether a combination of Facebook and Instagram could lead to Instagram users only being allowed to upload to Facebook, or if rival photo-sharing apps would be prevented from uploading to Facebook.
The U.K. regulator concluded neither possibility was likely and only would lower the appeal of the product of both companies.
Copyright 2012, The Bureau of National Affairs, Inc.
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