Zuckerberg's Deal Making for Facebook Is Central to Antitrust Cases

By Jeff Horwitz

The Federal Trade Commission's lawsuit against Facebook Inc. puts the regulatory spotlight on the deal-making history of Chief Executive Officer Mark Zuckerberg, who has personally engineered the tech giant's biggest acquisitions.

The FTC and a group of 46 states in separate antitrust lawsuits on Wednesday alleged that Facebook engaged in a yearslong campaign to acquire or stymie nascent technology companies that it feared could become rivals. The FTC said it was seeking court relief that could include forcing Facebook to sell two of its biggest acquisitions: messaging service WhatsApp and photo-sharing app Instagram, which competition authorities previously chose not to challenge.

The claims put the CEO's competitive behavior front and center. Since co-founding the social network in his dorm as a Harvard sophomore, Mr. Zuckerberg has closely managed its approach to rivals, including the deals for Instagram, WhatsApp and virtual-reality company Oculus VR, which have helped make Facebook into a giant with a market value of around $800 billion.

Facebook said that the complaints amounted to "revisionist history" and that the company's success was based on investment, innovation and value to users and customers. The Instagram and WhatsApp deals "were intended to provide better products for the people who use them, and they unquestionably did," Facebook General Counsel Jennifer Newstead said in a statement.

Mr. Zuckerberg's internal discussions about some of those deals, made public through Wednesday's complaints and through previous litigation and inquiries into Facebook's practices, have laid bare his competitive concerns over the years with upstarts that had comparatively tiny user bases.

Instagram and Path, another nascent photo-sharing and messaging service, "could be very disruptive to us," Mr. Zuckerberg wrote in a February 2012 email made public by the House Antitrust Subcommittee earlier this year. Mr. Zuckerberg suggested that if Facebook bought them, it would be able to lock in the market for their products before potential competitors could arise.

Mr. Zuckerberg had first expressed interest in a possible Instagram acquisition in the summer of 2011, when the product was available only on iPhones and used by fewer than 10 million people. Initially rebuffed by Instagram co-founder Kevin Systrom, who wanted to build his own company, Mr. Zuckerberg revived the talks on April 5 of the following year, just as Mr. Systrom was concluding an investment round that would have valued Instagram at $500 million, The Wall Street Journal previously reported.

Over the next three days, Mr. Systrom negotiated in-person with Mr. Zuckerberg at the Facebook CEO's home. Sheryl Sandberg, Facebook's chief operating officer, knew of the discussions but wasn't directly involved, the Journal reported at the time. Facebook's independent board members learned of the deal on April 8, when Mr. Zuckerberg sent an email declaring a deal to acquire Instagram for about $1 billion was nearly complete. Instagram at the time had about 30 million users and 13 employees.

The states' lawsuit references evidence that emerged in the House investigation that Mr. Systrom agreed to negotiate in part because he feared Mr. Zuckerberg would "go into destroy mode" if he refused, wielding Facebook's clout to hurt Instagram.

Instagram today has around one billion users and accounts for a large chunk of Facebook's advertising revenue and market value, analysts estimate.

"It's the CEO's job to be worried about competition," a person familiar with Facebook's thinking said Wednesday regarding Mr. Zuckerberg's role in deal making.

Mr. Zuckerberg, in a post to Facebook employees Wednesday, disputed the government's characterization of the company's competitive practices, and vowed to fight in court. "The reality is that we compete with many other services in everything we do, and we compete fairly," he said.

The CEO previously has said that Facebook's acquisitions owe much of their success to the resources and attention Facebook poured into them.

"By having them join us, they certainly went from being a competitor in the space of being a mobile camera to an app that we could help grow and to help get more people to be able to use," he told the House in July.

Rebutting such arguments can be hard, said John Yun, a George Mason University law professor who worked in the FTC's antitrust division. He noted that some of the startups that Mr. Zuckerberg's emails identified as threats, such as Path, fizzled out.

Mr. Zuckerberg also personally guided two big deals several years after Instagram. The 2014 purchase of Oculus for more than $2 billion was born of his fascination with virtual reality as a platform for social interaction.

And Mr. Zuckerberg that same year also personally negotiated the $22 billion acquisition of WhatsApp, which remains Facebook's largest deal. After proposing an acquisition of the messaging app on Feb. 9 of that year, Mark Zuckerberg hashed out the deal details with co-founder Jan Koum on Valentine's Day, the Journal previously reported.

That deal followed extensive concern from Mr. Zuckerberg and other Facebook executives that messaging services -- while so far offering only phone calls and texts -- might eventually grow to a point where they could rival Facebook in social networking.

"Those companies are trying to build social networks and replace us," Mr. Zuckerberg wrote in a January 2013 email in support of blocking a group of Chinese and Korean messaging apps from advertising on Facebook, which was made public by the House Antitrust Subcommittee.

Antitrust specialists say that even if the government can show Mr. Zuckerberg's intentions in doing deals were anticompetitive, that wouldn't on its own be enough to win a case against Facebook.

While contemporaneous records of an executive's discussions around a deal can be an attention-getting piece of evidence, said Prof. Yun, the government will also have to demonstrate Facebook's actions actually did suppress competition in harmful ways, such as by preventing an independent competitor from gaining the prominence that Instagram or WhatsApp achieved.

"The mere fact that someone says, 'We're buying this company because it's a threat,' is not proof of something illegal," he said.

Write to Jeff Horwitz at [e-mail]

(END) Dow Jones Newswires

12-10-20 0544ET